Roku, a streaming company that seemed to be sailing on a Netflix-like growth trajectory on the Nasdaq just six months ago, is now facing gathering storm clouds.
San Jose, Calif-based Roku reported 51% year over year growth in overall revenue for the third quarter to $680 million, missing analysts' consensus forecasts. Roku also added 1.3 million active accounts from June - September to finish the quarter with 56.4 million. However, Roku continues to see declining growth in proliferation of its platform on a sequential basis. Roku keeps adding new users to its ecosystem, but the additions have been smaller every recent quarter.
Roku continues to evolve into an advertising powerhouse, with revenue generated on its OTT platform up 82% year over year to $582.5 million. The expansion of platform revenue on a sequential basis also slowed from recent quarters.
Starting in the fourth quarter of last year, however, Roku began warning investors about supply chain issues affecting its hardware side of Roku's business. And those fears seem to be getting realized. "Player" revenue was down 26% in Q3 to $97.4 million, while player gross profit/loss went from a $20.2 million gain in Q3 of 2020 to a $14.6 million loss.
Those quad-core chips that power Roku gadgets are getting harder to find and more expensive. Roku wants to keep sales volume humming so as not to hinder active user growth and platform revenue. Something's got to give, and that something is Roku profit margins.
"Our player unit costs were impacted by the supply chain disruptions," Roku said in a letter to shareholders. "However, we chose to insulate our consumers from these increased costs to prioritize account growth, resulting in Player gross margin decreasing to -15%. We view this Player gross margin erosion as temporary, and we continue to take action to maximize our manufacturing flexibility, including active sourcing strategies and adapting our software and re-designing for more readily available chips and components."
Roku is also facing an escalating battle with Google, which could culminate in the most popular OTT app this side of Netflix being pulled from the Roku Channel Store on Dec. 9.
Roku had no update on the Google matter during its call with equity analysts Wednesday. Another potential and similar tech battle with Amazon, reported on late last week by The Information, wasn't even mentioned during the call.
Investors responded the way they usually do when the slightest iota of bad news is reported about Roku--these skittish traders once again absolutely hammered the stock. It's down 8% in after-hours trading as of the typing of this article.
The better news for Roku: "Platform engagement," which cratered in the second quarter, amid a poor year-over-year comparison to the height of the 2020 pandemic, when everyone was streaming video at home, rebounded by 600 million hours to 18 billion hours spent streaming on Roku in Q3.
