Roku stock plunges as pessimistic earnings forecast suggests ad budgets could 'degrade'

Roku stock plunges as pessimistic earnings forecast suggests ad budgets could ‘degrade’

Shares of Roku Inc. fell 16% in after-hours trading on Wednesday after the streaming company beat expectations with its latest results, but gave a weaker-than-expected outlook for the holiday quarter, because economic conditions could further “degrade advertising budgets”.

For the fourth quarter, Roku executives expect revenue of $800 million and a loss of $135 million based on Adjusted Ebitda. The FactSet consensus forecast revenue of $899 million and an Adjusted EBITDA loss of $48 million.

“As we enter the holiday season, we expect the macro environment to put additional pressure on consumer discretionary spending and degrade advertising budgets, particularly in the broadcast TV market,” the company said in its letter to shareholders. “We expect these conditions to be temporary, but it is difficult to predict when they will level off or rebound.”

Chief Financial Officer Steve Louden shared in a call with reporters after the release that the company’s guidance “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 dispersed ad market — which represents ads purchased during the quarter — than the typical television network. Scattered spend is easy for marketers to enable, but also easier to disable, he noted.

The guidance overshadowed Roku’s third-quarter results, which were overall better than expected.

The company posted a net loss of $122.2 million, or 88 cents per share, while it posted net income of $68.9 million, or 48 cents per share, in the period. ‘last year. Analysts tracked by FactSet had expected a loss of $1.29 per share.

Roku also reported a loss of $34 million based on adjusted earnings before interest, taxes, depreciation and amortization. The company had posted a positive Adjusted Ebitda of $130 million in the prior year quarter. The FactSet consensus expected a loss of $74 million on the non-GAAP measure.

Revenue fell from $680 million to $761 million, while analysts were expecting $696 million.

The company generated $670 million in platform revenue and $91 million in player revenue. Analysts expected platform revenue of $613 million and player revenue of $87 million.

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 year-over-year, compared to $44.10 in the second quarter and $40.10 in the third quarter a year earlier.

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

Louden noted on the media call that the account numbers “exceeded expectations.” The company reported “strong smart TV sales in the U.S. and overseas,” Louden adding that “it’s hard to say how much of a return to home or return to streaming, which is a very good value proposition if money is tight.

Viewers spent 21.9 billion hours streaming content through Roku’s platform during the period. The FactSet consensus was 20.9 billion hours of streaming.

Like companies like Netflix Inc. NFLX,
and Walt Disney Co. DIS,
digging deeper into ad-supported streaming, Louden sees an opportunity for Roku to be of greater value.

“It changes their focus a bit from just thinking about subscribers to thinking about engagement” and he sees Roku’s team members as “experts in understanding how consumers view this.”

The company also noted in its letter to shareholders that CFO Louden intends to leave Roku sometime in 2023 after helping recruit and train his successor.

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