Q3 was strong in terms of beating on the top and bottom line whereas the Q4 guide was very weak.

In the September quarter, Roku reported revenue of $761 million compared to $696 million expected. This represented 12% growth compared to 2.5% growth expected. On the bottom line, EPS of ($0.88) beat estimates of ($1.29). The company was expected to report adjusted EBITDA of ($75M) and instead reported ($34.4M)

In Q3, Platform revenue was up 15% and player revenue was down (7%). Strangely enough, Player revenue was stronger in Q3 compared to the two previous quarters when it was down (19%).

ARPU grew 10% to $44.25 and the company added 2.3M users. These two key metrics were strong compared to what other ad-tech companies have reported.

Despite the Q3 beat, the Q4 guide was troublesome. Roku was expected to report revenue of $906.6M for growth of 4.77% yet came in over $100M low with a guide of $800M. This represents growth of (7.6%). The adjusted EBITDA guide of ($135M) compares to Q3 adjusted EBITDA of ($34.4M).

I believe this statement is Roku’s admission they got the timing wrong on increasing opex:

“Our significant Q3 OpEx (operating expense) YoY growth was largely the result of robust hiring in late 2021 and early 2022 when we believed that the economy was emerging out of pandemic-related disruptions, and we were accelerating investments that we had previously deferred. We started taking steps to significantly slow the rate of hiring and other OpEx growth in late Q2, however, it will take a few more quarters for this YoY OpEx growth rate to normalize. We will continue to slow headcount and OpEx growth in response to the macro environment, while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value.”

Roku believes the scatter market is dropping quickly and they clearly stated it was not unique to them and was industry wide. They stated that advertisers lack confidence in the economy. This is affecting the Q4 guide on revenue. What you see below has essentially worsened for Q4, per Roku’s management.

Here is what was stated:

Anthony Wood

This is Anthony. So we are seeing – like Steve said, there's a lot of uncertainty. It's hard to say exactly what's going to happen in Q4, but we are seeing signs that Q4 is going to be worse in terms of the ad market than Q3 was, I mean we're seeing lots of big categories, pull back telecom, insurance. We're even seeing telemarketers planning on reducing their spend in Q4.

I think traditionally, Q4 is a very – the holiday season is typically the strongest period for a lot of companies, including Roku. But companies are pulling back their ad budgets because they're uncertain if there will be a recession or not. And so a lot of Q4 ad campaigns are being canceled. And so that's why I think this holiday season, given the unique set of environments and characteristics, is probably going to be different than the typical holiday season.

Conclusion:

Due to EBITDA issues, which management has stated “it will take a few more quarters for this YoY OpEx growth rate to normalize” we are looking for an exit. It will be Knox’s choice on how/when this happens given the valuation is already quite low.

When Roku opens tomorrow, it will be a 2 P/S. This is the type of valuation a company has that is going bankrupt or has a near-zero risk. Meanwhile, Roku has $2.02 billion in cash and is reporting ($91.9M) in free cash flow in the first 9 months. It’s unlikely Roku will need to raise next year or the year after. It’s also not isolated in its issues with ad budgets as we’ve seen the concerns around Q4 echoed across nearly every ad-tech company that has reported. The 2 P/S is more reflective of a company that needs to raise cash soon or a company that may go out of business or even a company that has inherent issues not reflected widely in its industry.

I believe we will buy this company again in the future if active accounts and ARPU continues to grow. These are leading indicators for media companies, and Roku will be on our radar quarterly to see when adjusted EBITDA gets sorted.