Roku, Inc. (ROKU) Q4 2021 Earnings Report, Transcript and Summary

All participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference to your host, Mr. Conrad Grodd, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good afternoon, and welcome to Roku’s Fourth Quarter and Year Ended 2021 Earnings Call. I’m joined today by Anthony Wood, Roku’s Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, Senior Vice President and 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 obligation 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 global supply chain disruptions 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.

Thank you, Conrad. And thanks, everyone, for joining us today. Roku delivered another record year in 2021. We have an enormous opportunity in front of us that we expect to capture. We have built and continue to expand a set of unique assets for this purpose. These include the Roku operating system, The Roku Channel and our sophisticated streaming ad platform. Our scale has passed 60 million active accounts, and we remain focused on being the best and largest streaming platform. The Roku operating system is poised to gain further market share as TVs shift away from costly proprietary operating systems. We expect manufacturers who want a best-in-class operating system to choose the Roku OS which is purpose-built for TV. The Roku Channel continues to gain momentum. Free, ad-supported services are the fastest-growing segment in TV streaming. In just four years, we built a flywheel that propelled The Roku Channel to a top 5 position on our platform in the U.S. This success is a result of combining a robust content portfolio with our ability to send consumers to The Roku Channel with superior content marketing and advertising features. Our ad platform is built for TV streaming. We believe large, traditional TV advertisers will continue to shift to Roku for the targeting, measurement, optimization and superior ROI that we provide. And for digital-first advertisers and small and medium businesses, Roku makes advertising on TV more accessible. We remain focused on maximizing our competitive differentiators, extending our industry leadership and driving growth, both in the U.S. and internationally. With that, let me hand the call over to Steve.

Thanks, Anthony. Before taking your questions, I’ll walk through operational and financial highlights and address the outlook. In Q4, we grew our active account base by over 3.7 million, resulting in 8.9 million incremental active accounts for the year, thus ending 2021 with 60.1 million active accounts. While we continue to scale, we believe that the slowdown in the active account growth rate in the second half of the year was, in large part, attributable to global supply chain disruptions that have impacted the overall U.S. TV market and our TV OEM partners in particular. This was partially offset by Roku player unit sales in 2021 that remained above pre-COVID-19 levels. In addition to increasing our scale, we are also growing engagement on our platform, with 2021 streaming hours up 14.4 billion year-over-year to a record 73.2 billion hours. In Q4, we grew streaming hours 15% year-over-year, while full year grew 25% year-over-year as we continue to outperform viewing hour growth of both traditional TV and other TV streaming platforms. Average streaming hours per active account per day was relatively flat year-over-year as we lap the pandemic-related demand spike. As a reminder, please see our shareholder letter for the full financial details from the quarter and the fiscal year, and I’ll highlight a few items. In Q4, total net revenue increased 33% year-over-year to $865 million. Platform revenue was up 49% year-over-year to a record $704 million, driven by strong content distribution and M&E growth. This was partially offset by temporary softness in advertising spend within the auto and CPG verticals, which have been most impacted by product availability issues related to supply chain disruptions. Q4 player revenue declined 9% year-over-year but was up 7% versus Q4 2019. Player unit sales were relatively flat year-over-year for Q4 and down 4% year-over-year for 2021. Gross profit, one of our key financial performance metrics, grew 24% year-over-year in Q4 to a record $380 million. Q4 platform gross margin was 60%, which was down 4.5 points sequentially as the platform business shifted toward a greater mix of video advertising. Player margin was pressured by supply chain challenges as we chose to prioritize account acquisitions and insulate consumers from higher costs. We estimate that excluding the year-over-year impact of component and logistic cost increases on the player business, total gross margin would have been roughly 4 points higher for Q4 2021. Q4 adjusted EBITDA was $87 million, and we ended the quarter with over $2.1 billion of cash, cash equivalents, restricted cash and short-term investments. Looking to the first quarter, we anticipate total net revenue of $720 million, up 25% year-over-year; gross profit of $360 million with a gross margin of 50%; and adjusted EBITDA of $55 million. Now, I’ll provide additional color on each of these estimates. Q1 total net revenue of $720 million reflects our expectations for standard Q1 seasonality, combined with the ongoing impact of supply chain disruptions on advertising spend within certain verticals. Next, conditions that positively affected gross profit and gross margin in Q1 2021 have shifted. The platform business, which had a larger portion of high-margin content distribution in Q1 2021, is expected to have a greater portion of video advertising in Q1 2022. Additionally, the player business, which had a strong positive gross margin in Q1 2021 is expected to have a negative gross margin in Q1 2022 as we continue to absorb elevated supply chain-related costs. Finally, our outlook for Q1 adjusted EBITDA is $55 million due to higher OpEx, which we expect to increase approximately 55% year-over-year as we plan to invest aggressively this year. As a comparison, adjusted EBITDA in Q1 2021 was $126 million, driven by a combination of very strong platform growth and lower OpEx growth as we slowed down investments due to COVID uncertainty. This demonstrates a strong return from prior monetization investments and the inherent leverage in our business model. Looking to the full year, I want to share my thoughts on supply chain, our investment strategy and our confidence in the business. First, supply chain. While we have seen some component costs decrease relative to peak prices in 2021, overall component and logistics costs remain significantly elevated and available issues persist. Thus, we believe these disruptions will continue to negatively affect the size of the TV market and our player margins in the short term. And we assume that ad spend in certain verticals will continue to be impacted by ongoing inventory availability issues until conditions normalize. Second, we intend to continue to invest in our growth. To date, our investments in people, technology and content have been successful, as demonstrated by our strong ARPU growth. Roku’s U.S. active account base has surpassed the U.S. video subscribers of all of the cable companies combined. Growing our share and extending our lead, both in the U.S. and international markets is the core part of our plan. For full year 2022, we plan to maintain adjusted EBITDA roughly in line with 2020 levels on an absolute basis as we continue to invest against a significant opportunity and drive continued innovation on the platform. Third, even with the volatility that is expected to result from ongoing supply chain disruptions, we believe Roku will continue to grow. And our estimate for full year 2022 year-over-year revenue growth is in the mid-30s. Our core belief is that all of our secular growth drivers that favor streaming remain in place, and we have an exceptional platform as our foundation to build upon. There is a long runway of growth in front of us, and we are investing to capture this opportunity. We remain confident in our business and our ability to execute. With that, let’s turn it over to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Justin Patterson of KeyBanc.

Great. Thank you very much. Steve, just going back to the annual revenue guidance of 35%. That reflects a very healthy acceleration from Q1 levels. Could you talk about what gives you the confidence in that and perhaps tease out some of the contribution from player and platform to get there? And then related, you’ve called out aggressive investment. Could you talk about some of the top priorities and whether things like controlling more of TV manufacturing play into that? Thank you.

Hey Justin, this is Anthony. I’ll kick off the answer and then turn it over to Steve. At a high level, the streaming platform business that we’re a leader in is a very large global opportunity. And we’re super well positioned to keep expanding our leadership in it. And so, we’re going to keep investing appropriately to the opportunity in our business. If you think about what we’ve accomplished so far with the money we’ve invested in our business, we’ve built some extremely valuable assets, the Roku operating system, which is the industry’s only purpose-built operating system for television and is the number one TV OS in the country and is making great progress internationally. The Roku TV program itself, where we build complete reference designs, license those to manufacturers and then help merchandise them at retail, and it’s been a super successful program for us. The Roku Channel, which is a top 5 channel on our platform, reached households with 80 million people in the quarter and it’s just been a big driver of our ad business, and then our very sophisticated ad platform. But those four assets we’ve built over the last few years, and we’re going to keep investing in them and keep growing them. And together, they were instrumental in driving our gross profit for the year of $1.4 billion, which was up 74%. So, -- over a tough comp. So, we just feel like there’s so much opportunity still in front of us. It’s still early days in the streaming platform business, which is a big global business or will be a huge global business, we’re going to keep investing for those reasons. And then, of course, there’s international, which we’re starting to see some good progress on, but it’s still very early as well. But, Steve, do you want to add any specifics?

Sure. Hey Justin, thanks for the question. So adding to what Anthony said, in general, we’re providing formal outlook for the near-term quarter. So, in this case, Q1 and some color on the full year. You mentioned the revenue growth we’ve said that we thought for the year, that revenue would be in the mid-30s on a year-over-year basis. There’s some things that factor into that. Obviously, like Anthony said, we’ve had successful investments in these key strategic investment areas. Historically, we think there’s a lot more opportunity out there both to drive scale and monetization. In terms of the Q1 versus full year view, on the revenue side on Q1, a couple of things to note, and a lot of this has to do with the comp and then the current conditions that we saw coming into the year. And there’s a couple of things. One is, I’d just point back to Q1, and this is similar to Q2 as well last year. That’s a good example of where we saw significant strong performance in the platform monetization side with revenue growth rates over 100% year-over-year in Q1 and Q2 of 2021. At the same time, we were curtailing our investment growth in terms of incremental headcount and other spend because of the COVID uncertainty. So, that aspect early in 2021 really shows the inherent leverage in the business. So, when you fast forward to 2022, in Q1 in particular, what we see is we see more of a mix shifting into the ad business because of such a strong comp on the content distribution side and M&E side. At the same time, kind of mid last year, we -- as we got through some of the worst uncertainty around the pandemic, we decided that we would continue -- or we kind of go back to our historical aggressive investment levels. And so, you’re seeing strong investment in the back half of 2021 and into 2022. As a result, we think that we comp in Q1, and those will be maybe slightly less tough as the year goes through it. And the other part we’re tracking is in the back half of 2021, we had strong supply chain disruptions that we’re still working through, but we’re hopeful those will mitigate over time.

Our next question comes from Laura Martin from Needham.

Do we have Scott on the line today or no?

Yes, I’m here.

Scott’s here.

Oh! Fabulous. Okay. Anthony, one for you, one for Scott. Fantastic. So, data, Anthony, yours is data. So, VIZIO makes $40 million a year selling some of their data. Your data is better because you have 3 times as many subs. My question is, would you ever consider, as a new revenue stream, selling part of your data, while keeping bunch for your proprietary use, to others as a new revenue stream? Scott, for you, I’m very interested in hearing from you what you think you’re most excited about as the ad revenue driver in 2022? Is it international ad growth? Is it like new markets like Mexico? Is it the upfront that’s coming up in May? Is it the integration of bottom of funnel e-commerce with advertising? I’m really interested in where you see the most growth upside and what you’re most excited about for 2022. Thanks, guys.

Hey Laura, it’s great to hear from you again. Sure, I’ll take the first question on data. I think, generally, we view our data that we generate in lots of different ways, including ACR, Automatic Content Recognition, which I think is the data you’re probably referring to. I mean, that’s an existing VIZIO business. But we view that data as basically a key part of our ad platform and a key competitive advantage. And so, we don’t have any plans to sell it. I mean, we sell ads. We sell lots of ad, and that business is growing incredibly fast, and our data is one of the key drivers. I don’t know, when Scott takes the question, maybe he might have an opinion on data as well.

Yes, I’ll just add to that. Data is our most valuable asset. And so, it’s not something we sell. It’s also obviously the wrong move from a consumer perspective. And frankly, we think the revenue optimal use of data is to keep it and use it for optimizing consumer experience and optimizing advertising. So, there are lots of reasons we’ve opened the hold back close consumer-oriented and commercial. And I think actually, if you look at some of those other platforms, they’re actually regretting their decision and in some cases pulling that data back. With regards to my excitement about 2022 ad opportunities, there are a few things. One is, as you’ll recall, we bought a division out of Nielsen last year that includes ACR and linear ad replacement technology. We will be rolling that out to beta in partnership with programmers. I’m very excited about that because it’s a whole other ad units to be sold into the marketplace to extend our reach. I’m also excited about our continued progress in the growth or performance advertising category. We really shine and we can leverage our data and our ad stack to help advertisers drive to real outcome, product purchases-type business, et cetera. 2022 is a big year for OneView as well. We’ve made good progress with selling OneView into agency holding companies and lots of other advertisers. And I think it will be a breakout year for us. We just last week announced Nielsen DAR guarantees in OneView. This will enable an advertiser to use our data and our ad stack to optimize the age, gender goals when buying from programmers in the Roku ecosystem. We have sold that product with our own media for years. We’re extending it now in what’s an industry first to all impressions on the Roku platform. So, those are just a few highlights of categories I’m excited about. I mean -- I guess, the punch line is there’s just tons of growth opportunity for the ad business. We might have driven 43% lift in ARPU year-over-year, but we’re nowhere near the ceiling of the ad potential in this contribution to the Roku Platform business.

Yes. This is Anthony. I mean you didn’t ask me, Laura, but I’ll answer anyway. What am I most excited about with our ad business? And I think there’s -- I would highlight two things. One is just the overall industry state, which is that consumers spend 45% of their time, their TV time watching streaming TV, but advertisers have only moved about 18% of their budgets over to streaming. And all TV advertising is going to move to streaming. So, there’s just still so much opportunity for us there, both to capture those existing budgets and to continue to innovate. And then the second thing I would highlight is just how powerful The Roku Channel has become as a source of ad inventory for us and how that’s driving just this incredible virtuous cycle around content, advertisers and viewers, and how that’s allowing our scale to invest in originals and just becoming -- just really upping the scale needed to be successful in that business is creating a big opportunity for us as well.

Our next question comes from Cory Carpenter of JP Morgan.

I’m hoping you could expand a bit on the drivers that led to revenue coming in below your expectations in 4Q, but simply the auto and CPG verticals being weaker than expected, or anything else to call out there? And then, on the supply chain, are you starting to see any signs of improvement at all, or maybe if you could just talk about how you expect that to impact active accounts in 2022. Thank you.

Hey, Cory. This is Anthony. I’ll start with some commentary on our platform business. Nonetheless, Scott wants to jump in or Steve to talk about supply chain. But just in general, our Platform business is doing extremely well. If you just look at the big picture, that revenue in 2021 grew 55% to $2.8 billion. That was driven by an 80% year-over-year increase in platform revenue. And there were some extraordinary circumstances. You should take a look at our shareholder letter for the details. But the fundamentals are strong. I mean, ARPU in the quarter was up 43% year-over-year. And there’s lots of room to keep growing that. I mean I mentioned the stat about how such a small part of the ad business has moved to streaming before with Laura’s question. I mean, it’s just so true, and there’s so much room to keep growing ARPU. Monetized video ad impressions nearly doubled in 2021. If you look at The Roku Channel, which is a key driver of inventory and ad revenue for us, it reached an estimate -- households with an estimated 80 million people. So, the business is very strong and still has a lot of room for growth. And it’s a diversified business. There’s a lot of different sources of revenue in that business, advertising, different kinds of advertising, M&E, content distribution, billing. There’s just a lot of sources of revenue into our platform business, and they’re all doing great. But, I don’t know, Scott, if you have -- or Steve, if you guys want to add.

Yes, I’ll just add a little more color on that, and I think there’s a -- supply chain question’s better for Steve to answer. Yes, Cory, just breaking down the platform business a little bit more. The M&E, so this is our endemic advertising business of promoting partner apps and content on the platform, certainly moderating after some major app launches in 2020 and early 2021, but it still is growing very significantly faster than the platform overall. Our growth or performance advertiser segment, these are advertisers who are optimizing the bottom funnel outcomes, roughly doubled our brand studio, which is our sales of sponsorships and unique brand integrations and executions on the platform had its largest quarter yet. And with regards to brand ad sales, advertising, excluding our M&E category, we’re still going strong there. I don’t want to overemphasize the temporary softness in auto and CPG. It was a relatively minor factor in the quarter. It was also not unique to Roku. Other segments for our brand ad business were up strongly. Restaurants -- travel was up 5x, a real bounce back from COVID, financial services. So bottom line is we remain bullish on the continued growth of the platform business.

Steve, do you want to...

Yes. And just on the supply chain side. As I mentioned earlier, the world continues to seek supply chain disruptions. We think those are coming into 2022, both in terms of elevated component and logistics costs as well as some continued inventory or component availability issues, I guess the good news is, in some cases, component costs have come back a bit from their peaks that we saw in 2021, but they’re still overall very elevated. So, there’s a way to go between here and normal, but we do expect those to normalize over time. The team has done a good job on the player side of keeping the streaming players in stock. And so, the main impact there has been on the gross margin where we had the flexibility, thanks to our increasing ARPU to insulate consumers for the prices and thus, the main impact is on negative gross margin. But we said in our outlook that we do expect that the overall U.S. TV sales market will be down below pre-COVID levels, at least in the short term. And so. that’s something that’s a bit of a headwind for our business in the industry.

Our next question comes from Shweta Khajuria of Evercore ISI.

Okay. Thank you very much. Let me try two please. One on supply chain. Could you please remind us what role, Roku, you play within the supply chain? And the follow-up to that is why not make your own TVs? And then, the quick question for Steve is on EBITDA. Steve, did you say 2022 EBITDA to be same level of 2020? I just want to make I heard it right.

Hey Shweta, this is Anthony. I’ll start and then turn it over to Steve. We interact with the TV supply chain in a bunch of different ways. So, when we talk about device or streaming players, supply chain issues, those are products that we build -- we design and build and manufacture ourselves. I mean, we use contract manufacturers like the entire industry, but we manage that process. We source the key components or help source the key components. And so, supply chain issues around players impact us when the main chips or what are called SoCs become -- when they become in short supply because of just general semiconductor shortages. That causes the price to go up. That impacts us in a bunch of ways, including it costs more to build the products, but also it causes our engineering team to have to spend time redesigning products to use alternate SoCs so that we can get access to more supply. So, it impacts us in a couple of ways. But in general, we’re managing through that and those issues are mitigating over time. In terms of TV, TVs, we don’t -- our role with the Roku TV program, which has been -- just I’ll take a quick second and talk about the Roku TV program. I mean, it’s been hugely successful for us. This is the program where we designed the reference designs for a television, and then we work with manufacturing and brand partners to build and sell those TVs and then we work with retailers to help merchandise them as well. And that program has been super successful for us, continues to be successful. We’re the number one TV platform in the country by unit sales as well as hours streamed. And we’ve become the number one TV platform in Mexico by hours streamed, number one in Canada by hours streamed. We’re making great progress in other international markets, a lot of that through our Roku TV program. But, in that program, those TVs are built by TV manufacturers around the world and sold through retailers around the world. And so, that’s the supply chain. And what’s been happening in TVs is that there’s been a shortage of panels and then it has also been -- it’s been much more expensive to ship televisions. It’s been more expensive to ship players as well, but TVs are bigger, and so it impacts them more. So, the result of all that is TV prices have gone up a lot for consumers, and that’s reduced demand for TVs. And so, that’s the big picture of what’s happening. In terms of us making our own TV, there’s rumors around that. We don’t speculate on rumors. I’ll just point out that the Roku TV program is a big area of investment for us. It’s been super successful. And we’re successful, not just because we have a great purpose-built operating system for TV, but we also are a great partner for manufacturers of TVs. We offer a full stack solution and are really very helpful for them growing their smart TV market share. So, that’s some thoughts on Roku TV and supply chain. I don’t know, Steve, if you want to -- if there’s anything you’d like to add.

Yes, I think you got it on the supply chain. Shweta, your second question was just around the 2022 EBITDA levels compared to 2020. So yes, in the prepared remarks, what we talked about is the OpEx investment levels, and we’re investing aggressively against a significant opportunity and a lot of great growth vectors, and we have a great platform to build upon. We talked about some of those things around investing in the Roku operating system, investing in The Roku Channel itself and then the ad platform, of course. So, one of the key things to mention in terms of the comparison to 2021 or 2020 is the fact that 2020 was a pre-COVID era, a more normalized basis when we were growing OpEx aggressively against these opportunities. In 2021, late -- or kind of mid-2020 and into 2021, we curtailed our investment growth because of the COVID uncertainty and then we’ve kind of stepped back on the gas so that the OpEx investment is a bit more aggressive like it was pre-COVID level. So that, combined with where we’re at in terms of a more normalized growth in the platform business compared to 2021, where especially in the front half, you had a platform growing 100-plus percent based on strong content distribution and media and entertainment as well as the fact that the OpEx investment levels were growing much slower. That’s leading us I think to a better comp in the pre-COVID level. So, we did say that we thought 2022 EBITDA levels would be around the same range as 2020 EBITDA on an absolute basis. So, I think that is a better -- a fair comparison versus the surge we saw on the top line in 2021 and some curtailed investment growth at the same time.

Steve, it might be worth just mentioning a little bit about the -- how we’re -- how our TV OEM partners were disproportionately affected by some of the supply chain issues.

Yes, sure. So, when you think about the supply chain impacts on the industry, we talked about sort of weaker demand because TV component prices and thus, TV consumer prices went up, it’s a low-margin business. So, those largely got past along. So, the overall TV market size did go down in 2021. And we think that’s below pre-COVID levels, and we think that will continue in the short term. The other piece, which impacts TV OEMs in terms of their unit sales and market share and thus the Roku TV market share was some of our OEM partners had specific component in inventory outages. And so that impacted some of their sales in Q3 and Q4. And so, that’s a big piece that’s a headwind for us on the TV side. Yes, we were fortunate on the player side to largely have inventory available, thanks to our team internally leveraging our scale and our relationships. So, we didn’t have the inventory availability on the player side, but that is a material factor in the last couple of quarters on the TV side.

Our next question comes from Vasily Karasyov of Cannonball Research.

Scott, I think it’s for you. I just wanted to ask you to speak in more detail about media and entertainment promotional revenue. Can you tell us about the options that you are offering currently through M&E advertisers, how their price may be CPM versus performance-based, et cetera? And then, if you could also tell us how did effective CPM evolve over time in this type of advertising? And what do you see driving growth going forward? Is it sell-through growth and impression? Do you think you have pricing power or to drive effective pricing up? So, get a lot of questions about this revenue stream, so I would appreciate your speaking in more detail about it.

Yes. Great question. Thanks, Vasily. Our North Star in the -- on the call -- yes, maybe you can mute. Sorry. Our North Star on the M&E business is driving outcomes for our clients, and we are uniquely positioned to do this as Roku. First, we’ve got the promotional units all throughout the Roku experience from the time you’re setting your device up, the ad on the home screen, teams, video ads, e-mail. In many ways, we are the checkout counter at the moment that the consumer is trying to make a choice of what to watch, we’re there to influence it. The second reason we’re uniquely positioned to do this is we’ve got the data to target and optimize these promotions. And then, the third reason is, especially for our M&E clients, the conversion events, the download of the app, the subscription to their service happens on our platform. And so, we have got a beautiful closed loop, data-driven way of optimizing for the outcome that our M&E clients care about, which is new users, engaged users, retained users. And that all basically enables us to drive outcomes more efficiently for our M&E clients than the other media they might buy on social media or in linear television. Now, as for your question about how we price it and how that might evolve. Today, we price on both a CPM or impression basis as well as on a performance basis. You can buy in either way for us. Most of our clients, whether they buy on a CPM or a CPA basis are ultimately measuring on the outcome that they care about. They’ll net it out to that. Our pricing is a function of a lot of factors. In Q4, there’s just such competition as new programming is coming out that we often have scarcity. So, that’s sensibility pricing. But, we’re also creating more supply throughout the user experience as we build more user engagement in the Roku home screen. So that’s an offsetting factor. And then, of course, at the end of the day, this is basically an auction among various bidders trying to get attention from more consumers to subscribe to their service, and so that tends to drive pricing. Ultimately, though, our pricing will be driven by our ability to drive the outcomes that these M&E clients seek. And as long as we keep getting better at driving outcomes, which we’re doing, because of our innovation around how we grow these services and our use of data, we’re confident in our ability to keep growing the M&E business and drive deal sizes and pricing. I hope that answers your question, Vasily.

Our next question comes from Michael Morris with Guggenheim.

I have a question about revenue and a question about costs. First, on the revenue side, on video advertising revenue, you guys noted monetized ad impressions on Roku Channel up 67% this quarter, I believe, which is pretty -- it’s a big number, but still a meaningful slowdown from the doubling you guys have been seeing before. I’m hoping you could break down a little bit for us how much of that was driven by these supply chain challenged industries that you spoke about versus how you sort of feel about what that growth trajectory looks like going forward? And my second question, I really want to come back to this spending growth next year. By my math, it looks like your spending is going to almost double to well over $1 billion, just using your revenue and EBITDA guide. I mean, it’s a pretty huge number. And Steve, I think you just said kind of goes back to pre-COVID levels or behaviors, but it’s multiples of what you were spending at that time. Now you’re obviously a much bigger company now, but I think this is a really big deal coming out of the call. So, I want to take one more opportunity to ask sort of in more detail what you’re spending on? Like which areas do you think this is going to power? And when we should expect to see the return -- the top line on this incremental spend? Thanks.

Scott, do you want to take the 67% question, which I’m not sure if that was correct.

Yes, sure. I think, the stat you’re citing, Michael, is our total monetized video ad impressions, not specific to The Roku Channel. We don’t break that out for The Roku Channel specifically. Roku Channel is growing much more -- much faster generally in terms of usage streaming hours, ad impressions than the platform as a whole. Still a very significant growth rate for us and represents a huge opportunity for us to keep growing into all the video ad volume that’s on our platform. I think -- sorry, your other question is on OpEx. Steve, do you want to take that?

Yes. I can take that. Hi, Michael. Yes, in terms of the investment areas, I mean, Anthony talked about our three core investment areas around the Roku operating system, The Roku Channel and the ad business. And will also throw in that these investments are not only in the U.S., but they’re also in support of international markets as well. In terms of how we usually invest, the main source of investment is people-based. And so, that headcount expense is the largest single line item on our OpEx. And so we’re continuing to invest in employee expense existing where we’ve been ramping up our hiring rates. So, that’s very important to the investment. In terms of some of the specific items that we’ll talk about around The Roku Channel, in particular, one of the things that we’ve talked about recently is this flywheel effect. So the -- Scott mentioned, The Roku Channel is growing much faster than the platform overall. That flywheel is driven by content, which is driving increased reach and viewership, which then allows us -- since it’s primarily AVOD supported, to sell more ads based on the supply from The Roku Channel. Really the scale of The Roku Channel and that growth trajectory is allowing us to invest more in the content. And it’s a combination of licensing. We’ve got 200-plus licensing partners there. But also in 2021, we basically came out with the Roku original side of the house, which we kickstarted with the acquisition of Quibi’s content distribution rights, but we’ve done a lot on that front as well. And so, that is a big piece of that, but with same within our AVOD model. And then the ad business, there’s continued opportunity there. So, we’re continuing to invest in parts of the technology features. There’s a lot of innovation on various road maps.

Yes. Sorry, I just want to jump in and just from my point of view, at a high level, the way I think about this is that the streaming platform business is a very large business, and it’s going to become an even larger, huger bigger business. And it’s got a huge amount of potential. And it’s the kind of business where there’s only going to be a small number of winners. In some ways, it’s very similar to what happened with like desktops, for example, where there used to be a lot of different companies to make PC operating systems and PC software. Now there’s -- every PC in the world comes to either Microsoft Windows or Apple Mac OS. Same thing happened with phones. There used to be lots of different companies making phones and phone software stacks, and now every phone that you can buy comes with either Android or iOS. And the same thing is happening in TVs. TVs historically have been very fragmented, lots of different software providers, lots of different places you can get a smart TV operating system, and it’s consolidating, and it’s going to consolidate down to a handful of winners. And Roku is the leading operating system in the United States right now. We’re making great progress in other countries as well. And we’re just extremely well positioned to keep investing in that leadership position and grow that leadership position as consolidation continues to happen in the TV -- in the platform space. It also applies to other areas like the ad stack. Scale is super important in the ad platform business. It applies to content. The Roku Channel has been hugely successful for us. We’ve been a leader in ad-supported free content. We’ve gone from licensing a few low-cost, old movies to producing our own multimillion dollar originals. And that’s happened on the back of hugely increasing scale, and that scale supports that kind of investment. And so, it’s just -- there’s just a huge opportunity. The stakes are getting bigger. And we’re in a unique position that we lead in all these areas, and we can grow our leadership position. And so, that’s why, for us, continue to invest really just makes a lot of sense financially for the -- in our quest to build a huge, large business. And I think we ran this sort of accidental experiment during COVID where we pulled back on the gas on investment in the future, and we saw how EBITDA started flowing to the bottom line. And so, that’s what will happen eventually. We will start to normalize. But -- and these days where we’re still pretty early in the building of these streaming platforms, we want to maintain and keep winning with our leadership position.

So, can I just ask, is wage inflation a meaningful part of this increase, or how much is just sort of like existing wage inflation versus how much is expanding the areas you’re spending on given your comment that people is such a big part of where the spending is going.

Yes, this is Steve. Yes. I mean, certainly, there -- it’s a very competitive market out there. So certainly, wages are going up. And like I said, that’s our number one component in our OpEx. So, that is certainly part of what’s factored into the outlook.

But the main driver is we just keep hiring a lot more people as we expand each of these key areas. Just one small example, we didn’t use to make originals. Now we have a whole team working on Roku Originals. We didn’t use to sell TVs in Brazil. Now, we’re building more and more models for Brazil. So those are places -- those are examples of places where we increase our headcount. The headcount investment usually comes ahead of the results, right? We have to work on it for a year or two before you start seeing the results. Thank you.

Our next question comes from Jason Helfstein of Oppenheimer.

So, I’m going to applaud the investment. For years, we heard from investors that you weren’t spending enough. So, I’m going to echo that albeit a tough data report earning. So kind of sorry about that. So, I just want to ask -- I don’t think anybody asked, but did you kind of say why you missed the revenue guide in the quarter? Steve, just maybe kind of give us just some color there. And then my second question, I don’t know if anyone asked this. I saw the announcement with the resale agreement with Entravision, Mexico. Maybe just talk a bit about what you expect out of that? Could that start to be like the first material bucket of international revenue. Thank you. International ad revenue. Thank you.

Scott can take the international revenue question. And then, Steve, do you want to answer the other question?

Yes. Jason, thanks for the kind words, and I appreciate you mentioning the investors that wanted incremental investments. So yes, I mean, I think, frankly, the incremental investment just shows the -- we’re bullish on the opportunity and the growth trajectories have great road maps ahead of us. So, we think that’s the right strategic decision. As Anthony talked about, the industry is going to consolidate around and we’re in a leading position. In terms of Q4, the biggest theme in terms of the results versus the original outlook expectations were around the level of supply chain disruptions that impacted the industry, our partners and us in particular, both on the account acquisition side, like we said, it was a smaller TV sales size in the market because of the higher TV prices. I had mentioned that TV prices were up 33% year-over-year in Q4, which was a tamp down on demand, and then we had specific TV OEM partners that had inventory availability challenges. And so, the main impact of that was certainly on the account acquisition side, but what we also talked about was we saw some temporary softness in some verticals around auto and CPG, where they had their own inventory availability challenges and so deferred some of the revenue spend. And so, that was more pronounced than what we originally thought it would be going into the quarter, and that was the biggest driver of the disconnect.

This is Scott. I’ll just tag on to sort of that question, and I’ll answer your question, Jason, about Entravision in Mexico. One other thing I’d say about Q4 was we were comping over a really robust Q4 2020. If you roll back to 2020, advertisers really suppressed spending in Q2 2020. And then, they made up for it in Q4. Drove a really strong Q4 for us in our ad business and, frankly, across the business. And so, we had a strong quarter in Q4 for the ad business, Q4 ‘21. But the comp, in addition to a couple of the -- softness in a couple of the verticals, as Steve mentioned, were the real drivers of the guide. With regards to Mexico, this is a great story, great part of our narrative of going abroad. Of course, we seek scale by getting televisions and players in the consumers’ hands, then we try to drive engagement and then we monetize. And in Mexico, we are through the first and second phases there with significant winning posture in terms of household penetration, user engagement. And so, it was very timely for us to launch Mexican ad business. We’re doing it in partnership with Entravision. Internationally, I’d also call out our success in Canada, where we’ve been scaling our ad business and our M&E business for several years now. So, we’re excited about the progress in Mexico. And of course, it’s also a great entry into activity elsewhere in LatAm.

Yes. This is Anthony. I mean, if you think about just international and the countries in the Americas, south of the United States, the two biggest markets by far are Brazil and Mexico. So, that’s why we focused on those primarily, and we’re doing great in both of those markets. In Mexico, we’re the number one streaming platform by hours streamed. And we just announced that we passed 20% market share for TVs with the Roku TV program. And so our scale has been growing there for a few years now. That’s why we’re starting to add on monetization in that region.

Our next question comes from Jason Bazinet of Citi.

There was a little bit of a question in the buy side about whether or not you guys would provide sort of a full year outlook, which I think is unusual for you. You can correct me if I’m wrong. But I’d be curious about two things. Why you decided to do that? And then, two, sort of what your sort of level of conservatism is or isn’t when you sort of lay out a full year guide versus a quarterly guide, which presumably is much easier? Thanks.

Scott -- I’m sorry. Steve? That’s a Steve question.

Yes. In terms of our approach to outlook, since the start of the pandemic, so coming on two years, we have focused on providing a formal outlook for the near -- quarter, in this case, Q1 and providing some color on the longer term or the annual view to the extent we have visibility. And so, what we talked about in the shareholder letter is continuing on with that strategy permanently and tweaking the outlook, moving from a range to our best estimate. And so, that’s really no different than what we’ve been doing for the last couple of years. I think it reflects the fact that, obviously, we have better visibility into the short term. In this case, we didn’t provide formal outlook for the full year, but we did provide some color on what we thought the trends were for the full year, and we provided a rough outlook for the revenue year-over-year growth range as well as the EBITDA level. So, we’re kind of somewhere in between, but we think that’s prudent just given the level of uncertainty in that factor.

Our next question comes from Ruplu Bhattacharya of Bank of America.

Thank you for taking my questions. I have two, one on platform revenues and one on your comments on the Roku OS. With respect to platform revenues, 4Q and the full year, the M&E spend, media and entertainment spend, was very strong. It grew faster than the platform revenues. Can you give us your thoughts on M&E spend for the full year 2022? And just maybe talk about, in the shareholder letter, it says delayed ad spend in vertical’s most impacted by imbalances may continue into 2022. If we go back to the pandemic in 2Q of ‘20, advertisers had pulled back, but they came back pretty quick after that and 3Q, 4Q were pretty strong quarters for your platform revenues. Just reading the shareholder letter, it seems that this come back this year might be delayed. So, just your thoughts on when you think the CPG and the auto advertisers might come back and spend more on the platform?

Scott?

Hey Ruplu. Yes, let me take this in parts here. First of all, again, I just would not overstate the impact of those verticals. We saw some softness. I think it’s anybody’s guess how the CPG and auto businesses deal with their supply chain issues, but we see robustness broadly across the rest of the ad business. And so, we’re -- it’s a relatively minor factor in the grand scheme of Q4 and our outlook going forward. With regards to the M&E business, we don’t guide to that business specifically. I’ll just say that it continues to grow strongly. The biggest services have launched on Roku, but they continue to spend very significantly with us because they’re not done acquiring users. And as they hit scale, retaining users becomes critical. It’s also a very competitive environment. We’ve seen quite a bit of share shifting within the top 10 apps as they compete for user attention. Consumers aren’t going to have subscriptions to all of these services. They’re going to pick and choose. And in a streaming world, it’s easy for them to subscribe and unsubscribe. And so, there’s a lot of competitive pressure on our partners to stay front and center when they invest in big new programming, they want to get behind it and promote it aggressively to users. And as I answered in the question earlier, we’re just one of the best possible choices for a programmer to utilize, drive awareness and tune it to their programming. So overall, we remain really bullish on the future of the M&E business. I don’t know, Steve or Anthony, if you want to add anything?

Well, this is Steve. I’ll just add because you mentioned kind of Q2 2020 and it popped back pretty quick with advertisers. I think that part is -- certainly, there was a pullback in advertising there, but I think it was a very different situation, right? That was early days of the pandemic. There was a lot of uncertainty across the board for advertisers that their business was going to drop off a cliff. And so, that was much more of a stabilize the ship, lower the operating expense burn and see where the world is going. In this case, where you have certain weakness in the advertising or a temporary slowdown in the advertising, in large part, these companies are selling everything they can produce. And I can tell you being in the market for an auto have a lot of pricing power on what they are producing, right? And so, they’re actually in a position of strength as opposed to a position of concern and weakness. But because of the supply chain constraints, there’s kind of an artificial disconnect where they’re not having to market. But there is a strong case for marketing and advertising once things normalize on that front. So, to Scott’s point, I think it’s -- certainly, supply chain disruptions are the main determinant on -- in certain verticals about kind of what their -- whether their spend levels will be normalized or not. But, I actually think a lot of these companies are in a very strong position, and it’s just this temporary disconnect of supply and demand that’s created a temporary stop in spend. But otherwise, they’re in great shape versus at the start of the pandemic, they were quite fearful for their well-being.

So Ruplu, I don’t know if that answered your question or not. And also, did you have something about you want to ask about Roku OS? I wasn’t sure if that was a question there.

Thank you. Our final question is Rich Greenfield of LightShed.

I guess, two big picture questions. One, Anthony, when you think about sort of the change in consumer behavior, moving from dongles to TVs, just wondering, do you have any way of telling how many people -- because I think one of the things people or investors fear is that as people move from sort of Roku dongles and then they buy a new television, that some of those are sort of inactive or those sort of active accounts become inactive accounts. I’m just wondering as sort of like as the shift from dongles to TVs play out, how do you -- like what are you seeing? What have you seen over the last year? And what do you think happens over the next couple of years? And then obviously, I mean, it’s sort of the obvious that everyone is sort of panicked about the state of streaming after seeing the results from some of the players, most notably Netflix earlier in the quarter, sort of revising long-term TAM? And I just -- when you think about the TAM of streaming, 300 million, 500 million, 1 billion, Jason Kilar said someone’s going to get to 1 billion. Curious what you think of the streaming market globally and where you think the TAM really lies, on the time to get to that TAM?

Sure. Great questions. We have 0 minutes left, so I’ll do my best. Let’s see, on TV versus streaming players, they’re both important to us, to our business. And we sell millions and millions of both. I think -- and I think -- so some of the dynamics there are that we sell a lot of streaming players to people that have an older TV or a competitor smart TV that doesn’t quite have the features that they would like to get or the content that they want. And then, when someone buys a new TV, they’ll take the older TV and move it into a bedroom, and they’ll also want to upgrade that with a streaming player. And so, there’s just a lot of different dynamics. They’re both important. They’re both big sources of active accounts. They’re both not going away anytime soon. But I would say, I guess, strategically, TVs are probably more important just because when you buy a smart TV -- if you buy a smart Roku TV, then whatever you have before you don’t need because it’s a great solution. And people keep them for about 7 years roughly. There’s questions about how long will software updates happen on the smart TV, we try very hard to keep updating our smart TVs for a long time, and we’re better at that than -- I think everyone else in the industry who will sometimes abandon or stop doing software updates to their TV after a two years. That also becomes a great place for us to sell a streaming player, too. So, they’re both really important. And if you look -- when you go overseas, there’s a lot of older TVs. And so, they’re both just very important for us. They have suddenly different dynamics, but I think the main message is just we need to do both, and we do do both very well. In terms of the TAM, I think if it is -- every broadband household that watches TV is going to switch to streaming. So, it’s 1 billion households.

Do you have any feel of why it slowed down so much?

Sorry, what?

Do you have any sense of like why do you think there’s been this slowdown that sort of panic investors. I’m not even talking about your stock. I’m talking about the entire streaming sector that people are starting to really just get concerned.

No, I think -- go ahead, Scott.

I would say, look, the market’s reception to this or that streaming company’s results and notwithstanding, as Anthony said, the number of households consuming television, what they spend on television, what their eyeballs are worth in terms of advertising hasn’t changed through all of it. So, the TAM really has not changed. And while I think individual streamers will -- their fate and their perception of the market will rise and fall according to their performance, at the end of the day, they’re all going to be on Roku and competing for share. And we see that playing out like never before on our platform, and it’s great ultimately for the consumer and great for Roku.

Yes. I mean, I would just say that there’s important differences -- strategic differences between a streaming service and a streaming platform like Roku. I mean they’re both great businesses to be in right now in terms of the fact that they’re all growing. But our goal, as a platform, is to offer as many different services as possible and give our consumers options. And I think if you’re a streaming service, your dynamics are different. If you’re one of the early streaming services, you didn’t really have much composition for a long time, and now consumers have other options. So, that’s one dynamic. And also, there’s just a lot of change happening right now. And then, the rise of free streaming services like The Roku Channel, which is doing gangbusters, I mean, there’s just a lot of different dynamics affecting the industry. But, at a high level for us, we built a business model where we can monetize -- we do monetize most streaming services on our platform and provide tools to allow them to be successful and provide them -- trying to be a great partner, trying to provide a good marketplace, try and help the consumer find content and just provide a solution that works for the entire industry. And just -- and of course, streaming is going to keep growing, and there’ll be 1 billion households that use a smart TV to watch TV. And there’s not going to be -- there’s only going to be a small number of those different platforms that win.

Thank you. I’d like to turn the call back over to Anthony Wood for any closing remarks.

All right. Well, I just want to say thanks to everyone. Thanks to our employees, and our investors for joining the call today. And we’re looking forward to continuing our growth and the robust streaming business that we’re in continuing. So thanks, everyone.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.