Roku Summary:
Every management team has a style and Wall Street (and/or the NLP machines – these two terms becoming synonymous) often penalize management teams that are more forthright. I actually like these teams better because I’m setting up for many quarters or many years for an investment. I’d rather hear the issues upfront so I don’t have to dig around for them like a detective. Roku is a management team that I can simply kick back and listen to the call because they tell you exactly the risks and the opportunities. The market, however, prefers more of a sugar high and Roku management isn’t great at dishing out sugar highs.
The words “tough year-over-year comps” came up a lot in Roku’s call. It would be easy to focus on those words and assume Roku is in a tough spot coming out of the increase of usage from last year. Meanwhile, I think Roku is as strong as ever. Remember that we are invested in the Pay-TV ad dollars trend. Those who question Roku think we are invested for the cord-cutting trend. The cord-cutting trend began around 2005. The Pay TV ad trend began in 2017 and started to contribute meaningful revenue in 2018. This is critical to understand.
If Roku were only a cord-cutting stock, the 1.5 million net adds could be a concern although it’s still 28% year-over-year. This is why there is market weakness right now. Essentially, Roku is experiencing the same pull forward that Netflix warned about, which is that the customers interested in streaming and converting from cable did so during Covid.
Global User growth does need to get sorted, and I fully expect the management to figure this out. Just remember, that some of the best global stories come from the best domestic stories. Meaning, the teams doing well in the United States are the ones who expand to do well globally. We do have Magnite as a global CTV company but their angles are slightly different, which I covered in the LTBH webinar. Right now, Roku has expanded to Canada, Mexico, Brazil, Germany and UK.
Let me quote Anthony Wood on just how unafraid of Google he is:
We've been competing with large companies, including Google in our space for since we started, and we compete extremely well. And the primary difference in the way we compete versus Google as we built from the beginning, a software platform designed specifically for TV, whereas they take their phone, operating system, Android, and they ported it to TVs. So if you look at the history of computing platforms, whether it's windows on PCs, or Android on phones, or Roku on TVs, purpose built, operating systems traditionally have always won in terms of market share. And it's because, when you build something from the ground up for a new user environment, for new business models, it's just more effective. And so that's really the kind of where the source of our competitive advantage come from. And it's working well for us and has worked historically, you know, we compete extremely well, we're the number one streaming platform in the US by a pretty wide margin., a software platform designed specifically for TV, whereas they take their phone, operating system, Android, and they ported it to TVs. So if you look at the history of computing platforms, whether it's windows on PCs, or Android on phones, or Roku on TVs, purpose built, operating systems traditionally have always won in terms of market share. And it's because, when you build something from the ground up for a new user environment, for new business models, it's just more effective. And so that's really the kind of where the source of our competitive advantage come from. And it's working well for us and has worked historically, you know, we compete extremely well, we're the number one streaming platform in the US by a pretty wide margin.
You can apply the same thought process to Samsung.
In the meantime, keep an eye on ARPU becoming disjointed from user growth. For instance, this quarter it was up 46% year-over-year.
Five-year trend in ROKU’s ARPU metric
Sequential growth in APRU over last 5 quarters – note that 2Q21 was the fast pace of QoQ growth since ROKU went public.
ROKU’s YOY growth in ARPU – YOY growth has accelerated for 4 consecutive quarters
The thing to ponder is why is ARPU going up so much? Here’s why I think this is happening:
The most important statement Roku made in this earnings call was in regards to signing all 7 major advertising agencies and the transition of Pay TV ad dollars. The company is talking about signing upfront contracts for television advertising.
This is a long quote so bear with me bc it’s important on what they’re saying.
Regarding your question about the upfront, it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. I think that's an indication that streaming has arrived as a first-class citizen in the way brands think about allocating their annual budgets, because it deals with all seven major agency holding companies and more than double commitments in terms of dollar basis. it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. I think that's an indication that streaming has arrived as a first-class citizen in the way brands think about allocating their annual budgets, because it deals with all seven major agency holding companies and more than double commitments in terms of dollar basis.
So it's definitely coming out of the pandemic, increased urgency by marketers to follow audiences, especially amidst steep ratings declines. Nielsen reported a 29% decline among adults 18 to 49 year-over-year. But it's also a function of our scale and our capabilities, including one view which played a pretty prominent role, our ad platform, our DSP, and our data. And this upfront season as well, our ability to offer originals exclusive content, the performance of that content in the time since as well as our new brand – branded content studio offering really resonated with brands and stuff, it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first-time upfront advertisers with Roku. So overall, we're extremely pleased with how we did the upfront and also think it's a good Harbinger for how we'll perform throughout the year during the scatter period. Thanks for the question. But it's also a function of our scale and our capabilities, including one view which played a pretty prominent role, our ad platform, our DSP, and our data. And this upfront season as well, our ability to offer originals exclusive content, the performance of that content in the time since as well as our new brand – branded content studio offering really resonated with brands and stuff, it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first-time upfront advertisers with Roku. So overall, we're extremely pleased with how we did the upfront and also think it's a good Harbinger for how we'll perform throughout the year during the scatter period. Thanks for the question.
In the LTBH webinar, I went over OneView and how Roku will be monetizing audiences outside of Connected TV and onto mobile and desktop. You can find this on our Roku and Magnite LTBH webinar around minute 28:00. That slide in the webinar is important to revisit if you’re wanting more information about Roku’s strategic advantage as a Pay TV/CTV ad exchange that can monetize beyond its own audience numbers. This is technically Roku becoming a demand side competitor by leveraging first party data. By focusing on Roku’s audience, we are only seeing half the picture (Roku’s position on the supply side). By “demand side,” I mean the side of the ad transaction for advertisers. By “supply side,” I mean the side of the transaction for publishers. In this case, Roku is moving onto the other side to work directly with advertisers. This is a critical change in their story that began with OneView although it’s not surprising or unexpected as strong first-party data ad players who own the stack typically move in this direction (Facebook, Google).
There are other microtrend stats the management discussed that confirms our understanding of where we are in the trend for a Pay TV ad stock (i.e., remember, we are not invested for cord-cutting although it’s a nice-to-have. Similarly, we are in Fubo for live sports and the synergies with sports betting — not the cord-cutting trend that began with Netflix). The first is that Nielsen reported a 29% decline for traditional TV networks among 18 to 49-year olds. The second statistic is that only 39% have a streaming TV service. Roku echoed what we have published in the past, which is that “it’s all going to move towards streaming.”
The Roku Channel is also growing steadily with management stating, "In Q2, we continued to drive robust growth of The Roku Channel with streaming hours more than doubling year-over-year."
Financials Overview
By Bradley Cipriano
Roku’s Q2 sales increased 81% YOY to $645.1 million, beating consensus estimates by 4%. Revenue was driven by a 46% YoY increase in ARPU (now at $36.46) and a 28% YoY rise in active accounts (now at 55.1 million). The firm’s platform sales surged 117% YoY to $532.3 million, an acceleration from the 101% and 46% YoY growth rates in Q1 2021 and Q2 2020, respectively. In fact, this represented the fastest pace of YoY growth since 2017, demonstrating ROKU’s ability to scale its ad business. Importantly, we believe that ROKU is still in the early stages of scaling its ad platform, as the international market remains untapped.
Offsetting ROKU’s platform sales, its player sales increased just 1% YOY to $113 million. However, we note that this number is somewhat subdued as ROKU decided to absorb cost increases (due to a tight supply environment) instead of passing them onto the customer with higher prices. Since ROKU absorbed the price pressures, it reported a -$7 million gross loss in its player segment during this quarter. Importantly, ROKU operates its player segment close to breakeven, as management prioritizes user growth as it scales its ad platform. This is a wise decision by management, considering the acceleration in its ad platform discussed above.
The math also shows that this strategy is sustainable. For instance, ROKU lost $7 million selling its players during the most recent quarter. Considering ROKU nets ~$19.12 per user per year, ROKU can make up the $7 million gross loss in the next twelve months with just ~350k active accounts.
Since ROKU added 1.5 million accounts during the latest quarter, it will easily be able to offset this relatively benigngin loss going forward. Unfortunately, management expects the negative gross margins in the player segment to persist into 2022, which will eat into the firm’s profitability.
On the bright side, ROKU’s platform gross profit rose 149% YoOY to $345 million, easily offsetting the negative margins in the player segment. Consolidated gross margin improved 1,120 bps YoOY to 52%, well above the trailing 3-yr average of 46%. These results flowed down to ROKU’s bottom-line, as 2Q21 EPS increased from a loss of -$0.35 in 2Q20 to a profit of $0.52 as of the latest quarter, which also beat the Street’s expectations by 351%.
However, we believe that ROKU’s current earnings are temporarily inflated. This is because the firm made cost cuts last year due to COVID-19, and management disclosed that expenses will rise going forward as these cuts are unwound to support future growth. Furthermore, ROKU has spent $98 million on media content acquisitions this year, instead of developing this content in-house. This approach temporarily juices earnings since the $98 million acquisition costs are initially capitalized and expensed over-time. If ROKU had developed this media content in house, it would have incurred the expenses more immediately.
ROKU also allocated $47 million of the $98 million of content acquisition costs to goodwill, rather than to media assets. This trend cosmetically inflates ROKU’s earnings growth going forward because goodwill is never expensed to the income statement (it is instead tested for impairment) and hence, distorts the true costs of acquiring the content. Nevertheless, ROKU acquiring media content is akin to a drug manufacturer acquiring a bio-tech firm with solid Phase 3 results. The media acquisition allows management to quickly ramp ROKU’s original media content and to remain laser focused on its ad platform, which is crucial to ROKU’s success.
Looking forward, ROKU guided Q3 sales to $680 million at the midpoint, representing a 50% YOY growth rate which was 5% above consensus. Similarly, 3Q21 EPS was guided to be ~$0.06, above initial expectations of a -$0.22 loss. We expect ROKU to continue to report strong topline growth, especially considering its untapped international opportunity. For example, ROKU has been selling its players to international markets such as Canada, the UK, France, Ireland, Mexico, Brazil and will start marketing its players in Germany in H2 2021.
Magnite Summary:
Roku critics point towards lack of global growth and market penetration. My personal thoughts are that global is way too early to call right now and that Samsung and Google will likely have its hands full competing with Roku long-term in emerging markets. However, Magnite provides exposure to global CTV ad dollars and this has been clearly laid out in our thesis both in our written reports and our LTBH 1-hour webinar. Magnite is our global CTV pick, essentially. With that said, the long-term growth rate of 25% from the company seems low and it’s my hope that the company is setting expectations correctly and plans to easily beat this guidance following its string of acquisitions.
The one thing about ad-tech companies like Magnite is that they use a lot of jargon in their earnings calls. I’ll help simplify the main points before we go into the financials.
Magnite is exposed to desktop revenue, reported under OLV revenue (online video). Therefore, it’s a big win for Magnite that Chrome is pushing out the removal of third-party cookies to 2023.
On the product front, Magnite is now an ad server on top of being a Supply Side Platform (SSP). Strategically, this allows Magnite to compete with FreeWheel and Google and helps them maintain their position “as the largest independent programmatic CTV marketplace.” The SSP allows for programmatic and private market place bidding while the ad server stores the creatives and serves the ads. The SSP facilitates the selling/bidding (auction) while the ad server actually manages, stores and serves the ads. SpringServe is the acquisition that resulted in an ad server for $31 million. The acquisition came from SpotX’s option to buy.
Here’s the flow when you visit a website or watch a connected TV app/show: The page or app calls the ad server, a bid request is sent to the SSP, the SSP auctions off the space to demand-side platforms and ad networks, the winning bid sends its creatives to the ad server, the ad appears on the site you’re viewing or the connected TV show you’re viewing.
In this case, Magnite now owns the full stack. The goal is to give small-to-medium sized publishers even less of a reason to work with FreeWheel and Google.
Overall, management continues to echo our understanding of Magnite’s positioning. They pointed towards India and Asia as markets the company is focused on. The company also repeated it’s discussion of private marketplaces and why an independent SSP on CTV can do well here compared to a public auction marketplace.
I’ve gone into detail on this point in the past, so I won’t elaborate fully here other than to paste this quote:
“With the traditional TV upfront season recently concluded, I’d like to clear up confusion regarding how we participate in these upfronts. Direct-sold and upfront refers to who is doing the selling, but direct and upfront deals increasingly include programmatic media spend commitments, because buyers and sellers want to realize the workflow efficiencies and targeting gains that programmatic provides.
So, how do we participate in upfronts and direct-sold CTV? First through private marketplaces, where our platform serves as the pipes that connect buyers and sellers. As you may recall, a substantial majority of our CTV revenue comes from PMPs. In supporting PMPs, our textures as a self-service productivity and workflow tool to efficiently execute CTV campaigns. We also participate in direct-sold inventory through our managed service business, which provides demand facilitation and serves as a great onboarding source to get buyers into the programmatic ecosystem.”-CEO of Magnite on Q2 earnings call
Here's an excerpt of what I’ve said in the past regarding private marketplaces:
“However, Connected TV inventory is unique as the inventory is premium and goes for $25 to $40 for placements on a private marketplace. This means that publishers will work with maybe one or two SSPs total as the private marketplace does not result in higher bids because the pricing is already agreed on.
SSPs and DSPs especially come under pressure because they don’t own the audience. However, Magnite is leveraging a few key strengths, such as becoming the primary independent SSP in the Connected TV arena. On the earnings call, the management stated that it would be hard for other SSPs to compete at this point, given the unique private marketplace environment of Connected TV. This is due to Magnite’s acquisition strategy, and we see the effects of this in the Disney partnership, where Magnite is the obvious choice on the supply side.”
The takeaway is that investors in Magnite, like ourselves, should understand that the bids occurring on private marketplaces is partly why Magnite can do well in the CTV environment whereas display ads online became highly competitive in an open marketplace.
Financial Analysis:
By Bradley Cipriano
In the prior quarter (1Q21), MGNI reported results that were underwhelming when compared to ROKU’s strong 1Q21 print. However, during the 1Q21 Conference Call, CEO Michael Barrett explained that growth had started to rebound in Q2 and that “all was well”. CEO Barrett’s comments were confirmed when the company reported 2Q21 results on 08/05/21, as 2Q21 sales increased 170% YOY to $114 million, 22% above the consensus estimate.
However, due to the impact from recent acquisitions, reported sales are not comparable to the prior year. As a result, MGNI also disclosed that adjusted pro-forma quarterly sales increased 79% YOY to $100 million, which assumes that acquisitions were closed last year and also adjusts for traffic acquisition costs (TAC). On a segment basis, CTV pro-forma sales increased 108% YOY to $34 million, while on-line video and display pro-forma sales increased 60% YOY to $66 million. Due to nuances in GAAP accounting following MGNI’s recent acquisitions (discussed below), we believe that adjusted pro-forma sales are the best metric to use to measure MGNI’s true growth rate in the near term.
MGNI’s financial results continue to be tough to analyze from a financial perspective. This is due to all the moving pieces, as the company has made a series of transformational acquisitions in the past year and a half, which has complicated YOY comparisons. Nonetheless, these acquisitions have positioned MGNI to benefit from the rise in connected TV (CTV) ad spend and the industry-wide migration from direct ad sales to programmatic ad auctions.
For instance, MGNI recently closed its $1.2 billion acquisition of SpotX on April 30th, 2021. MGNI stated that “following the Telaria Merger and SpotX Acquisition, we believe that we are the world’s largest independent omni-channel sell-side advertising platform, offering a single partner for transacting globally … and the largest independent programmatic CTV marketplace … allowing buyers access to a global, scaled, independent alternative to "walled gardens," who both own and sell inventory and maintain control on the demand side”. We had also discussed back in April that the SpotX acquisition will allow MGNI to rapidly expand internationally, which should support increased growth and margins going forward.
While the SpotX acquisition positions the company to succeed in the CTV ad market, it also unfortunately complicates MGNI’s accounting. For example, SpotX recognizes sales on a gross basis, while MGNI had previously recognized most of its sales on a net basis (net of TAC). As a result, the company has reported an adjusted pro-forma growth rate to help investors better gauge MGNI true topline growth rate.
Moreover, since SpotX recognizes sales on a gross basis, this can artificially dampen MGNI’s reported gross margins, as the topline is inflated while gross profit remains static. As well, accounts receivables are accrued on a gross basis, which makes MGNI receivables balance appear severely outsized relative to sales. A ballooning receivables balance can signal that a company is pulling forward sales, which is a negative trend and something investors tend to avoid. We suspect that MGNI’s complex accounting is having a temporary negative impact on MGNI share price, due to a subdued gross margin and an inflated receivables balance. However, these concerns will likely dissipate as MGNI’s results start to annualize and the Street gains a better understanding of MGNI’s future growth prospects.
At the moment, the Street is dependent on management’s adjusted, pro-forma metrics. Looking forward, management guided for 3Q21 sales (excluding TAC) to be $115 million at the midpoint, representing a 15% sequential rise in sales (89% YOY). Management also guided for 3Q21 CTV sales of $43 million at the midpoint, which represents a robust 27% QOQ growth rate (307% YOY).
During its Q2 Conference Call, management explained that its long-term expected growth rate (ex-TAC) will be ~25% with 30% to 35% adjusted EBITDA margins.
As a comparison, TTD reported that its Q2 sales grew 101% YOY to $280 million, while the company guided for Q3 sales to grow 31% YOY (1% QOQ) to $282 million with a 35% adjusted EBITDA margin. TTD did not provide long-term guidance.
Vuzix:
Summary:
This summary was posted on the forum on August 10th.
Vuzix committed the two cardinal sins for an earnings report — which are: 1) a big miss and 2) vague guidance.
Before I go into those issues around the earnings report, I want to point out that the company is actually on the right track. This is a technology that had zero adoption for decades and our report outlined that the medical industry is likely the right industry for Vuzix to see early adopter traction. You can read our previous coverage here where we point towards the medical industry as a main driver: https://io-fund.com/premium/ar-vr-h2-2021-update-and-vuzix-deep-dive
The company reported 240% growth in surgical eyewear sales in the most recent quarter. The earnings call listed many medical corporations and hospitals who are using Vuzix and will continue to buy more from the company. This market is expected to be in the $6 billion range by 2025. If Vuzix owns 8% of the market, that will be $500 million in revenue. It’s looking like that will be reasonable for Vuzix as they are doing well in this this industry in terms of early adoption. Perhaps it’s contrarian right now in the face of a terrible earnings report, but I believe the medical industry and manufacturing are (indeed) moving forward on augmented reality and will require hardware (smart glasses) for this rather than a mobile phone (Apple’s iOS).
We were very early to Unity with coverage at IPO regarding its augmented reality potential. As I write this, the company reports today. If you’re a Unity investor, you’ll need to ask yourself if it’s for AR gaming or AR enterprise. I’d say at least 50% of Unity’s story is for AR enterprise. If you agree with me (read my report here), then keep in mind, enterprise AR will not be displayed or utilized on a mobile phone. As you know, we plan to revisit Unity after we get more information on how IDFA affects the company as gaming is primarily driven by app downloads on iOS. So far, most companies are saying the impact has been delayed so not sure what we will get today AH.
My concern with Vuzix is not its long-term potential. I think the company will be firmly on the map after a few quarters. AR enterprise is a viable market for tech investors to consider, and as I’ve stated in this intro, AR enterprise requires glasses. Snap has a loophole with Apple’s iOS which is why we recommended this one many months ago but what you’re seeing with Snap now will eventually be seen across the entire AR market.
There is no way around the fact that AR will require hardware. That’s not my concern with Vuzix, rather it’s whether we are parking our money in a stock that won’t give us gains in the next 5 months. This is because we have to compete on performance. Therefore, if we close Vuzix, we will likely re-enter early next year. Right now, we are not closing Vuzix rather it’s up to Knox and his chart work (he is laying out a plan for the forum). My understanding is that his thoughts are that he prefers to catch the company on an uptrend.
Vuzix Earnings: Unpacking the Disappointment
I actually don’t mind if a small cap stock that is taking on a sizable TAM has a big miss as long as the key metrics I’m tracking come in strong. Smart glasses grew 21% and as stated the industry where Vuzix is likely to see the most sales were up 240%. Medical sales makes up 25% of revenue.
The company’s official reported that the sales of smart glasses for the three months ended June 30, 2021, rose 21% in the period to $2.8 million led by a 22% increase year-over-year in unit sales in the M400 smart glasses and a 77% year-over-year increase in Blade smart glasses revenues.
There was certainly an increase in expenses with R&D up 50% and sales and marketing up 164%. This is despite engineering services declining from $600,000 to $300,000 (we aren’t invested in the company for engineering services so no matter to us on this).
What bothers me is a lack of guidance. As an investor and shareholder, I’d like some idea as to what a company is expecting in terms of sales. This is all we got:
Christian Schwab
Hey, good afternoon guys. Thanks for the slide presentation. I guess when I'm looking at Page 4 of the slide presentation and in the commentary and the prepared comments, I'm just trying to figure out, can you give us a range of revenue outcome that you expect for the year in 2021 and what type of growth rates we should really be thinking about in the second half of 2021 versus the second half of 2020?
Grant Russell
Yes. 2021 should continue to see consecutive growth as we move from our second quarter. Some of the business in the second quarter was timing related, frankly. That said, none of the SaaS-based software that we expect ultimately will start to add to the revenue stream. I would count in a second, especially in the third and fourth quarter of this year, even though some might be there. So you're probably going to be a little bit softer match. I think it's right in line, Christian, with the numbers that we discussed in the past. I think you look at the 3 million to 4 million units for the kind of a numbers, and then more in the fourth quarter.
Christian Schwab
Okay. Okay.
Grant Russell
That’s hard forecast there. Sorry.
Christian Schwab
Yes. No, I appreciate that. I guess if we sum up those numbers, I mean, could Q4 be big enough to do $20 plus million this year? Is that a little bit too optimistic and it may take too many things going in the right direction right now?
Paul Travers
It would take some things going in the right direction. I mean, it's not impossible to see that some of the business we had could do that, but I mean, I can't, we certainly would not give that advice right now, because there's question marks on the timing for it. And unfortunately, this industry is zero down. It's coming. You can see it, our business continues to grow and move forward. And the size of some of the things that we're talking about are getting bigger and bigger without doubt. It's only a question of, is it this month, the next month, in and out based upon the timing. Yes. It could be there Christian, but we'd have to really work to make that happen.
Knox has been pretty clear on the forum that small caps are out of favor. When this sector is out of favor, it can be brutal. When the sector is in favor, investors run around withbe in a state of FOMO. We want exposure to some small caps because there is outsized reward when you do well in this category. We don’t see any nefarious issues here with Vuzix and we don’t think this quarter defines the opportunity. With that said, we are using purely technicals at this point to determine if we remain or exit the position. We do this with most momentum stocks and I’m stating this as more of a reminder than anything unique to Vuzix.