Roku stock plunges as pessimistic earnings forecasts assume ad budgets could ‘decline’

Roku Inc. shares fell. It rose 16% in after-hours trading on Wednesday after the broadcaster beat expectations with its latest results but gave a weaker-than-expected forecast for the holiday quarter as economic conditions could lead to “deteriorating advertising budgets.”

For the fourth quarter, Roku executives expect $800 million in revenue and a loss of $135 million on an adjusted Ebitda basis. The FactSet consensus called for revenue of $899 million plus an adjusted loss for Ebitda of $48 million.

“As we enter the holiday season, we expect the macro environment to place further pressure on consumers’ discretionary spending and reduce advertising budgets, particularly in the TV penetration market,” the company said in the shareholder letter. “We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or recover.”

CFO Steve Lauden shared in a call with reporters following the release that the company’s outlook “reflects the fact that we see a lot of challenges in the macro environment.”

He explained that Roku tends to have more exposure to the scattered ad market — which represents ads purchased during the quarter — than the typical TV network. He noted that it’s easy for marketers to turn on scattered spending, but it’s also easy to turn it off.

Expectations overshadowed Roku’s third-quarter results, which were broadly better than expected.

The company reported a net loss of $122.2 million, or 88 cents a share, while it reported net income of $68.9 million, or 48 cents a share, in the same period last year. Analysts tracked by FactSet had forecast a loss of $1.29 on a share basis.

Roku also posted a loss of $34 million based on adjusted EBITDA. The company had reported a positive adjusted Ebitda of $130 million in the previous quarter. FactSet’s consensus was a loss of $74 million on a non-GAAP measure.

Revenue rose to $761 million from $680 million, while analysts had expected $696 million.

The company generated $670 million in platform revenue and $91 million in gamer revenue. Analysts expected the platform to generate $613 million in revenue and $87 million for players.

Roku had 65.4 million active accounts last quarter, up from 63.1 million in the second quarter. Average revenue per user was $44.25 on a 12-month basis, compared to $44.10 in the second quarter and $40.10 in the prior year third.

Analysts were expecting 64 million active accounts and $43.40 in average revenue per user.

In the media call, Louden noted that the account numbers “exceeded expectations.” The company has seen “strong sales of smart TVs both in the US and internationally,” with Louden adding that “it’s hard to say how much it pays to switch home or go back to streaming, and it’s a very good value proposition if money is tight.”

Viewers spent 21.9 billion hours streaming content on Roku in that period. The FactSet consensus has been for 20.9 billion hours streaming.

As companies like Netflix Inc. NFLX,
and The Walt Disney Company DIS,
Explore ad-supported streaming in greater depth, Louden sees the Roku opportunity as being more valuable.

“This shifts their focus a bit from thinking only of subscribers to thinking about sharing” and Roku team members see them as “experts in understanding how consumers perceive it.”

The company also indicated in its shareholder letter that CFO Lauden intends to leave Roku sometime in 2023 after helping to recruit and train his successor.

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