Yahoo Finance Roku's Most Important Metric Is Growing Faster Than Ever
Roku (NASDAQ: ROKU) couldn't wait to share some good news with investors about its fourth quarter after providing disappointing guidance in November. The company preannounced two metrics that it's been focusing more and more on: active accounts and streaming hours.
Active accounts increased to 27 million in the fourth quarter, up 40% year over year. That's slightly slower than its growth rate last year, which reached 44% in the fourth quarter.
Streaming hours increased 68% to 7.3 billion for the quarter. That's the best growth rate Roku has posted since going public, and it's arguably the company's most important metric considering it's focused on increasing average revenue per user.
Here's what's driving acceleration in streaming hours and what it means for investors.
Image source: Roku.
Roku everywhere
Roku has moved beyond just selling its streaming devices that plug into television sets. More users now come from licensed sources than its first-party hardware, the company said in its third-quarter letter to shareholders. Specifically, Roku's operating system is one of the most popular smart TV operating systems among consumers. The company estimates about 25% of smart TVs sold through the first three quarters of 2018 came with Roku OS preinstalled.
Owning the television operating system enables Roku to gain more streaming hours. The Roku home screen is the first thing Roku TV owners see when they turn on their television. Additionally, Roku TV users have more features than standard Roku users. For example, if a user is watching a rerun of a show through their cable provider, Roku can suggest a way to stream that show right on the screen.
Roku announced two new agreements with TV manufacturers concurrently with its preliminary fourth-quarter results. It plans to make an 8K television with voice controls with longtime partner TCL. It also made an agreement with Westinghouse to license the Roku OS for its smart TVs.
The only television operating system with a greater market share than Roku is Samsung (NASDAQOTH: SSNLF). Roku partnered with Samsung last year to enable Samsung smart TV owners to stream content from The Roku Channel.
The Roku Channel is one of the most important products at Roku, providing ad-supported video content. The company either directly licenses that content or has a revenue-sharing agreement with the content owners. It's a growing source of revenue for Roku, and expanding the reach of the service has proven effective. The company also expanded The Roku Channel to the web, so anyone with an internet connection can access the content.
More engagement probably means more platform revenue
While increased streaming activity doesn't necessarily translate into increased platform revenue, it's a good indicator for revenue growth.
Roku generates revenue from its platform in two ways: distribution fees for subscription video services and advertising.
Distribution fees are pretty straightforward. If a Roku users buys a subscription to a premium subscription video service through their Roku device, the company gets a share of that sale.
Advertising is a bit more complicated. Roku has lots of ad products. It has display ads shown on the home screen, which might entice a user to install a new channel. But it also offers in-stream video ads. These are ads that show up in the middle of films and TV episodes streamed through The Roku Channel, but Roku also enables other channels to use its ad platform and shares the revenue with them. So Roku can benefit directly from an increase in streaming hours even if they're not in The Roku Channel.
Investors should expect an update on the progress of tTe Roku Channel when the company reports its fourth-quarter earnings in full. It's likely content additions and improved access were a key part of the increase in streaming hours last quarter.
Roku recently made a move to capitalize on the popularity of The Roku Channel beyond additional advertising revenue. It'll soon sell subscriptions to popular subscription video on demand services directly in The Roku Channel, creating a content hub for users. That could lead to even higher engagement with Roku going forward, and it'll be an important product to watch for investors.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
