Roku, Inc. (ROKU) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2018 Roku Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today’s call, Mr. James Samford, Vice President of Investor Relations. Mr. Samford, you may now begin.

Good afternoon. And welcome to Roku's financial results conference call for the second quarter ended June 30, 2018. I'm pleased to be joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, the GM of our Platform Business, who will be available for Q&A. Please be sure to review our shareholder letter, which contains much more details than we will cover in the introductory remarks. The following discussion, including responses to your questions, reflects management's views as of today, August 8, 2018 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 third quarter and full-year 2018 and the future growth of our business. Our actual results may differ materially from those discussed on this 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 reconciliations to non-GAAP measures to the most comparable measures discussed today in our shareholder letter, which is posted on Company's Investor Relations Web site at ir.roku.com. I encourage you to periodically visit our IR Web site for important content. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period in 2017. Now, I'd like to turn the call over to Anthony.

Thank you, James, and thanks everyone for joining our second quarter earnings call. The strong momentum we saw entering 2018 continued this quarter as we expanded our reach to 22 million active accounts, up 46%. ARPU was up 48% year-over-year to a record high as per customer revenue continued strong growth. We are pleased with this growth but know these are still early days as consumers, content providers and advertisers, continue to make the transition to streaming. The Roku Channel continues to be an area of focus and growth for us. Our Roku Channel strategy is to focus on free longform content, expand content categories, extend to platforms beyond the Roku OS and broaden into new geographies. For example, we recently added news to the Roku Channel and we recently announced availability in Canada. Today, we launched the Roku Channel for the Web, allowing anyone to stream free movies and TV shows. And we also released the Roku Channel as an app on select smart Samsung TVs. Another important announcement in the quarter was the launch of our new Roku TV wireless speakers. These are specifically designed for Roku TVs and use the Roku connect wireless protocol. These speakers dramatically increase how easy it is to improve the sound quality on a Roku TV. This makes Roku TV more appealing to consumers, which should increase loyalty and engagement. On the advertising front, we are making our targeted capabilities and technology more accessible to content publishers and advertisers through our new programmatic audience marketplace. This is an exciting time to be in the streaming business. The massive TV ecosystem is moving to modern platforms with streaming at the center of a more dynamic and innovative approach to content distribution. At Roku, we are determined to deliver enormous benefits to consumers and to help content publishers and advertisers thrive on our platform. Before opening the line up for questions, I'll turn it over to Steve for brief comments on our results and outlook.

Thanks Anthony. We had a particularly strong quarter, which is turning 2018 into another great year for Roku. Our active account growth of 46% year-over-year came from the strength in both players and Roku TV. Please see our shareholder letter for the full financial details from the quarter, but I will highlight a few items before turning to comment on our outlook. Total Q2 revenue increased 57% year-over-year to $156.8 million with platform revenue nearly doubling again and representing 58% of total revenue. Monetization of our platform continues to be driven by strong advertising growth, which is the largest and fastest growing part of Roku, but we also saw very strong content distribution revenue growth this quarter. Player revenue growth of 24% was particularly strong this quarter with robust demand for streaming players across both our retail and partner channels. And we saw less impact from discounting or mix shift to low price players compared to last year. Player units were up 22% year-over-year and ASPs were up 2%. As we have said in the past, player revenues can be lumpy based on a variety of factors, including timing of retail shipments, partner promotional campaign and supply chain and inventory levels. Heading into Q3, we are comping against a very strong Q3 last year and based on visibility we have today, we expect player revenue to be roughly flat sequentially and year-over-year. Q4 is seasonally our strongest quarter for players and we anticipate delivering modest positive year-over-year growth. Our key financial performance metrics is gross profit, which was up 107% year-over-year this quarter to a record $77.8 million. While the biggest driver was platform gross profit growth of 84% year-over-year, player gross profit benefited from lower COGS from the release of accruals of $8.9 million related to potential IP licensing liabilities that have not materialized and management now believes will not materialize. Excluding these accrual releases, which did not impact revenue, total gross profit was up 83% year-over-year and gross margin expanded six percentage points year-over-year to 44%. We continue to invest in our strategic initiatives, primarily via increased headcount, resulting in year-over-year OpEx growth of 53% to $78 million. Adjusted EBITDA came in well ahead of our outlook at positive $7.1 million in Q2 based on strong overall results and the benefit from IP licensing accrual reversal. In the New Year, we adopted the new revenue accounting standard ASC 606 details of which are disclosed in our first quarter 10-Q, which we filed in May 2018. In the income statement for this quarter, revenue and gross profit under ASC 606 were roughly $3.1 million and $0.8 million higher than they would have been under ASC 605 respectively. Most of the impact was in our platform segment related to the gross up of both revenue and cost of goods sold for inventory split ad impressions. The difference between 605 and 606 will continue to be highly volatile in the back half depending on a variety of factors such as timing and terms of contract signings or modification, mix of ad inventory and timing of delivery of obligations under existing contracts. Based on what we have reported year-to-date and our visibility into the back half, we now expect the overall difference between 606 and 605 for the year to be positive $5 million to $10 million on revenue and roughly neutral on gross profit. With that brief overview, let me turn to our outlook. Based on our strong performance year-to-date and what we know as of today about account growth, engagement and monetization trends, we are again raising our full-year outlook. Our updated full-year outlook increases to 40% revenue growth and 61% gross profit growth at the midpoint, up from prior growth rates of 36% and 49% respectively when we provided outlook in May and 31% and 43% growth in our February outlook. Consistent with what we’ve said in the past, we plan to reinvest gross profit upside back into R&D and sales and marketing to fuel continued growth and innovation. And the effect of these investments, which is primarily headcount related is expected to show up in 2019 and beyond. Based on the strength of the first half of 2018, we now expect positive adjusted EBITDA for the full year, up from at or near breakeven previously. As you may have seen in recent 8-K filings, we signed a new lease agreement that will significantly expand our real estate footprint over the next few years, and provide us with capacity to grow. We expect this to add incremental expense in CapEx in 2019 and 2020. Our goal continues to be to manage the business at roughly breakeven during this period of market expansion, and we will provide more detailed outlook for 2019 in our Q4 earnings call in February. For Q3, our outlook for year-over-year revenue growth of 35% at the midpoint factors in a roughly flat player revenue growth and modest slowdown in Q3 platform revenue growth, primarily due to tough comp in the prior year when platform grew 137% year-over-year. Continued mix shift to video advertising and seasonality in player margin is reflected in our outlook for year-over-year total gross profit growth of 47% at the midpoint, and nearly 4 percentage points of margin expansion. On the expense side, we are adding talent at a rapid pace, which factors into our outlook for a modest adjusted EBITDA loss in Q3 before rebounding to positive adjusted EBITDA in our seasonally strong Q4. Overall, the fundamentals of our business are strong and we continue to see plenty of opportunities to reinvest in our business to solidify our long-term growth potential. Thank you for your continued interest in Roku. And with that, let's turn the call over for questions. Operator?

Thank you [Operator Instructions]. Our first question comes from Evan Wingren with KeyBanc Capital Markets.

Just wanted to ask about the Roku channel launching for free on all devices. Obviously, it's very early. But is there any way you can give us a sense for how you think about the longer-term opportunity with this announcement in terms of drive engagement in new accounts and monetization? And then just a follow-up to that would be is the content set that you currently have for the Roku channel available or will there be incremental investment necessary for content or marketing? Thank you.

This is Anthony I'll start and maybe Scott can add something. Just overall our strategy - to recap our Roku channel strategy it’s free longform content so [indiscernible] service. Our goal is to keep expanding [reach] [ph]. So one way we’re going to do that is expanding our platform, so we announced for example, our Web launch today. We plan to expand to more geographical regions. So for example, we recently announced we’re entering Canada. And then we plan to keep adding more content categories, particularly longform content. So for example, we added news recently. So we’re making good progress on that strategy. And I'll let Scott answer the question around the economics.

And just to add to Anthony's comment and by way of background, the Roku Channel launched last September. We’ve had huge success with the channel on our platform in the time since. The channel is already a top five reach channel in terms of the number of users or accounts that it reaches in a given month. And it really validates the original thesis behind the channel, which is that there is this great thirst amongst OTT consumers for free content. So the announcement that you saw today are really an extension of that thesis and taking that experience off platform where we can amplify the impact that we have for our content partners, extend reach for our advertisers and ultimately meet new users who may not yet have Roku. In terms of your question, Evan about content, the strategy is -- take the same types of content off platform and give users the same experience. And as I said with our content partners the dialogue is really around how can we expand the number of people and ultimately the money that they earn in partnering with us to provide free ad support experiences like Roku Channel.

Thank you. Our next question comes from Jason Helfstein with Oppenheimer.

So our work suggests that Roku channel advertising could be as high as 15% of your total advertising. Without commenting that's right or wrong how do you think about the margins of Roku Channel advertising relative to the rest of the ad business? Second question, is it possible to get an update on the Samsung partnership, potential timing, any color, will this be older sets, newer sets? Any help would be helpful. And then lastly, Steve, on this $8.9 million benefit. Would you agree that the right way really to strip it out, both in the quarter and the guide, and obviously that’s one time and really could be out of the compares for 2019? Thanks.

With regards to your first question about the contribution of the Roku channel, I’m not going to disclose the percent today, but I will say it’s already a material contributor to our ad sale, not just in terms of raw volume but the opportunity for us to create new ad experiences, because it's a wholly controlled experience. So for example, we are regularly now crafting sponsorships that live within the Roku channel. These are unique experiences that allow brands to message directly to our users. With regards to your question about Samsung, we’ve already been active in sponsorship activity on the Samsung platform. And with today's launch, the Roku channel going live, we’ll be extending the Roku channel experience to Samsung sets. These are select Samsung TVs but generally the newer models, the Tizen models, as Samsung calls them.

Just on the $8.9 million for the IP licensing accrual release that’s a process that we do regularly. We review all our accruals and contingencies and then we assess the likelihood for them to materialize. This quarter it was a particularly large number. So I think it's appropriate for you to look at it and back that out as a unusually big accrual release versus standard what we experienced in any given quarter.

Thank you. Our next question comes from Ben Swinburne with Morgan Stanley.

Two questions. Anthony, could you talk a little bit about your TV OS landscape and a little bit about your expectations for signing new partners and landing new agreements to look out over the next couple of years. And in particular I’d be curious why you think some OEMs use Roku OS for some SKUs but not all of them. And what the opportunity might be to take that to the relationship you have with TCL? And then just for Scott, the Roku audience network I know it’s new. But can you give us any qualitative commentary on how your publishing partners have responded to that, how they might be using it? And any help on thinking about the revenue model for Roku, given I think it's a data services business rather than something where you’re the principal seller of that. Any help there would be great. Thank you.

So Ben so on TV, this is Anthony. On TV I would say at a high level, it’s progressing as we expected. Our thesis is that all TV OEMs will switch to a licensed operating system, just like all phone company, phone makers either license Android or the Apple. That same dynamic is happening in TVs and we’re by far the number one licensor of OS to TV manufacturers. One in four smart TVs in the first half of the year, were licensed Roku TVs. So it’s going well. And in terms of the dynamics around what's coming next I think you will continue to see us adding more OEMs and adding more SKUs at retailers. So I think that will continue. The -- why do OEM - some OEMs not carry 100% Roku SKUs, because they are still I think learning and finding their way and still learning that Roku SKUs sell better. So they are not necessarily all in at once. But we generally deliver excellent results working with partners and they generally increase the SKU count as their business with us progresses. So the TV business I think it’s doing well. Our biggest competitor in that business is [inertia] [ph] with homegrown OSs. But as companies that continue to ship their own operating systems start continue to lose market share then there I think that will drive everyone to eventually license an OS.

Ben, with regards to your question about the recently announced Roku audience marketplace, what I’d provide by way of background is that from the very beginning, our goal with advertising at Roku has been elevate, to evolve the state of advertising to make TV advertising natively targetable, interactive, much more highly measured like any digital media that a modern marketer expects. As you know, we run a robust and very fast growing ad sales business of our own, but the majority of ad inventory flowing through our platform is still sold by publishers on our platform. And so a consistent request from the beginning from our publishers that we serve in many ways has been to help empower them with some of the same capabilities, so that they themselves can commence higher CPMs and compete in this evolving TV world. So the marketplace is really about deploying our ad tech and our data so that premium publishers like Fox, Viacom and Turner can sell addressable interactive high-value campaigns, leveraging the capabilities that we built at Roku into our operating system.

Our next question comes from Laura Martin with Needham & Co.

Maybe a couple, so I think first, Scott, we just went through our first upfront and we got the final numbers today at the upfront, it was up 5%. But I’m interested in what your learnings were from being in the TV upfront this year and whether you can give us more granularity on your process and anything you’re willing showing upfront? Second -- how about Anthony, Apple is saying that the China tariffs are not affecting them. Can you just let us know if any of these TVs or any of these lists so far, and whether you think the Chinese tariffs will affect any of your deals with Chinese TV manufacturers? And then my last question is normally you give us -- the last couple of quarters, you have given us of your added users, what -- you said half are Roku TV. I assume that this huge over delivery on the player side means that that was lower, meaning units accounted for more. So could you size for us how much the units added to this quarter versus Roku TVs on the user side that would be great? Thanks guys.

So in terms of the tariff, this time we’re not seeing any financial impact from the tariffs. They don’t appear to affect any of our products. It’s something that’s changing and we’re monitoring it carefully so we’ll keep an eye on it.

Laura, with regards to your question about the upfront, I don’t have any specifically things to mention here except to say that they went very well. This is really the first time in our ad sales business history where we were participating in the upfront planning window. And I think the big takeaway for us is this is really the first year in which advertisers are proactively planning for OTT as part of their annual TV spending plan. Roku now uniquely delivers 10% of adult 18 to 34. So if you're planning against that critical demo, you’ve got to include OTT in your planning process. And we were very active across town in equipping these teams with the tools to think about the portion of their budgets that should be spent against OTT. So I’d characterize our activity in the upfront is very successful. Anthony, do you want to take the question…

I think, Steve, do you want to take that?

Laura, I will do the users. So yes, in terms of the mix between the licensing and players, players had a particularly strong quarter. It certainly can be lumpy. But given that the mix for licensing versus player went slightly under 50%, but we don't think that's a consistent trend. And so we still think the majority going forward will be -- new accounts will be generated from licensed sources.

Thank you. Our next question comes from Mark May with Citi.

Thanks for taking my questions I have two if I could. First on players, given the upside and player revenue. Can you talk about if the player channel move back into greater than 50% position in terms of source of new active accounts this quarter, and how you’re thinking about that? And secondly you talked about mix shift in the ad revenues to channels where your gross margins are closer to 50%. As it relates to the Roku channel since its -- is it fair to say that is one of your higher margin channels, and much higher than the 50%? Just trying to give a sense of how that’s impacting the platform margins. Thanks.

As part the answer to last question, I did mention that players had a particularly strong quarter, both in terms of retailer demands and content promotion, partner promotion. That did drive the licensing to player new account percentage down where licensing was a little under 50%, but we don't think that’s a consistent trend going forward, more of a blip just give how strong the player business was. The player business can be lumpy and so that’s something that we wouldn’t recommend extrapolating in our -- as we mentioned in our remarks that we think the player business, on a revenue basis will be roughly flat sequentially and year-over-year in Q3 and then a modest growth year-over-year in Q4. In terms of the mix shift in ad revenues, I would really look at it in terms of -- within the platform segment, the video advertising business on average is roughly 50% business or slightly better. And then other pieces of the platform in terms of audience development or the content distribution side, those tend to be much higher margins. So I wouldn’t necessarily specify CRC versus non-CRC video ads, more of how the video ad business overall runs.

Mark this is Scott. I would just add to that that while margins are healthy in TRC it’s also an incredibly strategic channel for us for the reasons I mentioned earlier. It’s a channel that we fully control. We can create new ad product and new experiences. It’s a vehicle for us to go off platform. And so while we certainly are -- care about the margins and achieve healthy margins in the channels, it’s also got incredible strategic value to us as a platform.

Thank you. Our next question comes from Ralph Schackart with William Blair.

Two questions if I could. First, just curious what drove the reacceleration or modest reacceleration in streamed hours, just general market continuing with OTT or the Roku channel have pronounced impact there. And then two, Steve would you mind us clarifying what you talked about for EBITDA margins. I know you talked about increased OpEx for the facility and reinvestments. But did you say that you’re potentially going to look to run the business at breakeven in 2019.

Just in terms of the streaming hours, the streaming hours in the active accounts have been growing in similar range, and they can bounce around each quarter. Active accounts were up 46% and the streaming hours were up 57%. So I wouldn’t note any material change in terms of acceleration of streaming hours per se, it's been relatively consistent relative to the growth rate of the active account. So it's been growing faster than active accounts consistently, which has speaks to increased engagement on the platform but nothing more significant than that. In terms of the EBITDA for facility, as we mentioned that we signed a new headquarters lease, we think that will have incremental OpEx and CapEx. Frankly, that's really business as usual as we’ve been continuing to grow and our lease will be up soon and we’re running out of space. In terms of running a breakeven in 2019, I mean that’s been a stated goal before so just reaffirming that. Certainly, we will get into the more specifics on the 2019 guidance when we get to the February call. But that’s been a consistent plan is we think there is tons of growth opportunity and we’re still early days in the transition of streaming. And we have a lot of great investments so we’re going to continue to manage the business to invest in these growth opportunities as the gross profit growth continues.

Thank you. Our next question comes from Thomas Forte with D.A. Davidson.

So I have two questions. The first is, with I think it was the mid May launch of live news. Can you talk about how user engagement is with that content versus the other content in the platform? And then second now that you have additional hardware SKUs with the speakers. Can you tell us what your strategy is on profitability? For example, do you intend to -- all the speakers at breakeven similar to your other hardware, the players? Thanks.

So in terms of news, news is doing well on the Roku channels. We haven’t broken out the percentage, but its meeting our expectations and doing well and adding engagements. Engagement continues to grow on the Roku channel, it’s moved up to a top five channel in reach. So we’re pleased with the progress. The strategy of course like I said before is to keep adding more content sources. So we added news and we’re going to be adding more types of content as well, primarily longform and of course free content and expanding reach with new off-platform distribution and more geographies. In terms of the speakers, I am really excited about our new speakers. They’re awesome I’m using them at home and really enjoying them. They sound excellent. But it’s not -- for us, the reason we’re doing wireless speakers is it’s not really about generating hardware revenue, it’s about making the Roku TV platform an even better TV platform. So we believe that Roku TV OS licensing platform that we license is the best smart TV platform in the industry, but we think we can make it better. And one of the things -- one of the ways we can make it better is making it super easy, bringing it to an ease of use to a new level when a customer wants to enhance the audio of their TV. TVs are getting thinner results that just from physics is sound quality gets worse so people want to upgrade the audio quality of their TVs. And they do that today with home theater systems or sound bars, and those systems can be expensive and they are certainly not easy to use or connect. And so with the Roku TV wireless speakers, you just plug the speakers in, they pair to the TV and now you got better sound on your TV, it’s just a much, much better experience and they sound great. So for us it’s about making the Roku TV platform even better, more appealing to customers and we think that will result in more loyalty to the Roku platform.

Thank you. Our next question comes from Mark Mahaney with RBC Capital Markets.

So I want to just about outreach efforts with advertisers, or any color you can give us on other verticals, particular advertisers you’d call out that have really -- are engaging a lot more with Roku, a lot more with OTT advertising opportunities, just color on that side of the business. And then how many people you have that are trying to go out to advertising, and then any thoughts or final thing on that, on the use of the application of programmatic as an advertising solution. Thanks a lot.

With regards to the advertisers we service, at the end of the day, we’re a TV ad platform. And so we’re seeing activity across every vertical that’s active in TV advertising, whether that's financial services or CPG or farmer auto. If we over index, it would be in entertainment, because at the end of the day, we’re an entertainment platform. We’re doing business with well over 50% of the top 200 national advertisers and every quarter we crack new accounts, most of that top 200 now are in renewal phases with us. With regards to how we go about securing that business, we’re a natively digital ad stack, programmatic is coursework platform. The audience marketplace, which we spoke about a little earlier on this call, is programmatic at its core. Data driven selling programmatic based techniques are, in our opinion, a central component of the future of the way TV advertising is going to be traded. But it’s also true that the vast majority of the $70 billion that’s spent in TV advertising today is bought and sold in a more traditional fashion. And so we do have a team that services that aspect of the business as well. And to Laura Martin's question earlier also about our participation in the upfront that’s a central way in which we go secure TV ad dollars as well.

Thank you. Our next question comes from Paul Golding with Macquarie Capital.

So starting off of featured free functionality in the platform, I was wondering if you could speak to whether this is more of a display ad opportunity for you guys. That seems like these are pretty premium services that are going to be fed through it, so I’m not sure if this is an inventory opportunity as well, or just simply a user interface opportunity for engagement. And then a quick follow-up on the tariffs question earlier. I was wondering if there was anything you could speak to around suppliers and diversification of geography of supply of OS TVs and players, or any color around that. And then my last question is around Roku Pay and whether there's anything to be said right now around new developments or functionality for easing the OTT subscription pay and processing through that?

Let me just talk a little bit about feature free. So one of the things we believe about the Roku platform is that it’s the best platform for free content. Obviously, all the paid services are available in the pathway but people want value when they switch to streaming and that means people like free content. And of course our ad business is the poor driver of our gross profit, and so we’re big fans of free as supported content as well. The feature free feature is the new main menu option that aggregates all the free content -- not all of it, but a lot of the free content that’s available and Roku makes it easy for customers to find There is lots of free content on Roku, but there is also 5,000 channels on Roku and it’s -- a viewer might not know where to go to look for free content. So the primary goal is to aggregate that into one spot from a UI experience make it easy for consumers to find it. And when they find something they want to watch they click on it and then it deep links into that app, so it runs the app and then launches that channel. So that’s a combination of editorial -- it's an editorial based feature so we decided what goes into feature free. And we obviously want to help consumers -- I mean, we want put good content in there but we also want content that we have good economic relationships in there with as well, so kind of a combination there. In terms of tariffs, I don’t have much more to say about tariffs, except that they don't currently affect us. Our TVs -- we have a lot of different TV manufacturers and they are not built in China. We have TVs built in different places around the world as well. And then I'll let Scott to talk about Roku Pay.

Roku Pay remains a major area of investment for us. Our view is that it removes the friction for consumers to sign up for services, buy movies on our platform and it’s a great service for our content partners who are interested in acquiring users on our platform. And so it remains a key area of investment and technology and talent side of things and really central to our subscription business and also our audience development business where our publishers basically buy advertising from us to drive people into that pay funnel.

Thank you [Operator Instructions] Our next question comes from Vasily Karasyov with Cannonball Research.

I was wondering if we could drill into the video advertising revenue in the quarter. If you could help us size up either the size of the video revenue or year-on-year growth and what drivers were most important volume versus pricing? And also, would you be willing to tell us what percentage of streaming hours were actually supported, i.e. monetizable for you, excluding -- that exclude SVOD and YouTube? So any color around those variables would be super helpful. Thank you very much.

We have not broken out video ad revenues specifically, but what I'll say is that the ad business runs about -- it flows up and down about two thirds of our platform revenues and the video ad portion of that is our largest ad business. Your question with regards to volume or pricing -- pricing is really strong and growing. The big driver of our growth is really volume and selling into new accounts and getting existing advertisers to spend more with us. We don’t disclose the exact portion of our leadership that’s AVOD. I’ll just say there that as you can see by our investment in TRC and featured free that ad support viewing remains one of our strongest growing segments. It's really a investment for us and a big part of our making such progress on engagement and monetization of the platform.

Thank you. Our next question comes from Alan Gould with Loop Capital.

I’ve got two questions please. First, what kind of response you’re getting from the content producers that are supply programming to Roku, whether Roku channel as the channel is getting more successful. And also do you have the rights to take the programming across platforms and across geographies, or you just have different programs on the Roku channel depending on the geography? And my second question is I would assume we’re getting close to the shipments of the new TVs for the holiday season. I believe you’ve got about your 25% market share of TVs are now Roku powered. What do you think that's going to look at the -- what do you think that market share will be at the holiday season?

The response Alan from content partners in their partnership with us on TRC has been great. The important thing to know is that there’s just mountains and mountains of IP out there of great programming that’s being under-monetized. And the Roku channel, because of its success, has become a really powerful vehicle for content partners to reach consumers in monetizing our platform. Our success there is a big part of how we are now exporting TRC to other platforms. Our content partners want to partner with us in that endeavor. You had a question about geography. So yes, I mean as you go into other geographies, the licensing teams or paradigms to shift but within the U.S. our cross-platform deals tend to be singular deals.

And regarding TV, the TV business is really doing well and we’re growing market share there. Other than the outlook we’ve given, we don’t have any particular outlook for the second half of the year. But I would say that just our TVs are getting great reviews, the TCL 6-Series is an awesome TV just one CNET editor’s choice. Roku TVs are the top-selling TVs on amazon.com. That our fundamental thesis that all TV manufacturers license an OS is not changed we believe that the case. And our market share in the first half was one and four smart TVs in U.S. that means three and four are not Roku TVs, and those are almost all, what we would call homegrown operating systems. And I’d believe that the dynamic of a Roku TV having a better cost structure and much more content and a better user experience is going to result -- is resulting in more and more OEM switching to the licensed OS of which Roku is number one licensor of OS in the U.S. and we expect to remain in that position. So I think the market share is going to continue to grow as TV manufacturers switch to licensed OSs.

Thank you. And our next question comes from Rich Greenfield with BTIG.

I got a couple. First, when I see on the Roku channel things like Cheddar programming or people TV, I assume that those are channels that are content that is more than willing to benefit from the advertising opportunity that Roku presents given the amount of usage that you're getting off of that channel. But when I see things like the Matrix trilogy, which is the highlight today on the Roku channel. Are you buying that content or essentially paying upfront for that content from Warner Brothers? How does that work when we're seeing really high-profile movie content showing upfront in center in the Roku channel? Are the economics different? And I think essentially tied to the last question that Alan asked. Do you have access to the Roku channel up in Canada and across all devices, or does it vary based on platform and country, et cetera? And then I have a quick follow-up.

I’ll let Steve and Scott answer your question on the Roku channel. But first I just want to note that not a single person or call who has congratulated me on our quarter today. So I’m not sure what's going on [Multiple Speakers] would be rich…

That was amazing…

But anyway, Scott, you want to…

Great quarter, Anthony…

Yes, thank you.

Rich, the answer is the mix of models is evolving, it’s still early days certainly that’s the case for international. We really just launched TRC in another geography in Canada as part of a new push abroad for us to take some of the same ad capabilities that we’ve built here in the U.S. to other geographies. Our economic models are a mix of, Web shares and then many of our content partners with apps on our platform are now also syndicating content into the Roku channel. So they have like Cheddar, they have [Multiple Speakers]. Since you brought up Cheddar, there is a Cheddar app on Roku but then there is a Cheddar live stream within the Roku channel. And our view is that at the end of the day for IP owners what's going to matter to them is traffic and monetization and that partnership with us around a property like the Roku channel is a way to supercharge the audience and earnings that they see on the platform.

And so we should assume that there is some amount of capital that you're committing towards actual licensing of content, a minimal amount but some level of capital?

We do directly license some content. But I think, for example the Matrix, titles like that come part on the Roku channel, I think -- I know it's just a reflection of this increasing scale of the Roku channel and the ability to operate with the same economic model that offers more popular content.

We’ve got a little less than a year under our belt. We’re getting more and more confidence in predicting what users are going to consume, what's going to resonate with them. We’re getting more and more expert -- not just at prediction but actually promoting, driving traffic around it and that’s why you will see us get bolder with great titles like the Matrix Trilogy.

And then just a quick follow-u, or a separate question. So one of the most interesting apps that I’ve seen launch over the last few years has been something called Locast, which is launched on Android, basically is providing free over the air television in New York and Dallas. They don't have a Roku app yet. But it would seem like a great way for you to offer on Roku devices, and potentially even on the Roku channel, a wide array of high-quality premium content. Is that something you're interested in and looking at other ways? I know Areo I think had a channel on Roku at one point before that was shut down. But how do you think about new forms of over the air television making its way on to your platform.

Most of what I know about Locast is from reading your note on it, Rich. But I won’t comment on future apps coming on t the platform. We do remain an open platform and I think we’ve demonstrated interest in all programming coming on to the platform. I don’t think we’re in a position to comment specifically on their strategy or its merits.

But there is no reason Locast couldn’t be on the Roku platform and we’re curious to see how it does.

Thank you. Ladies and gentlemen, thank you for participating in the question-and-answer portion of today’s call. I would now like to turn the call over to Mr. Anthony Wood for any closing remarks.

Thanks. I’d like to close by saying we are pleased with this quarter's results and the positive outlook for the rest of 2018. We’re making great strides in growing active accounts, engaging TV viewers and helping content publishers and brands reach them. I am particularly excited about our rate of innovation. This quarter alone, we introduced the audience marketplace feature free, Roku TV wireless speakers and expanded the Roku channel. Thanks for all your support and for joining today's call. And I look forward to seeing you again next quarter. Happy streaming.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect, and have a wonderful day.