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Roku Q3: A Much Better-Than-Expected Debut

The first earnings report from a freshly minted stock is always a nail-biter. That was the case with Roku (NASDAQ: ROKU), maker of streaming-video devices, which just released its inaugural set of quarterly figures following its popular initial public offering in September.

Although analysts expected a significant earnings loss, they also believed the company would post hefty year-over-year revenue growth. So did Roku deliver? Read on to find out.

Image source: Getty Images.

Streaming higher sales

For the third quarter of 2017, Roku posted net revenue of just under $124.8 million, which was 40% higher than the same quarter of 2016. In terms of revenue mix, the company's hardware offerings -- essentially its set-top boxes -- were responsible for 54% of the quarter's total. The platform segment (basically software) comprised the remainder.

Of the two, the latter saw better growth. Its take increased by 156%, while hardware's rose by 4%. 

On the bottom line, the company booked an adjusted net loss of $8.6 million ($0.10 per share), an improvement over the $14.2 million ($0.17) in red ink it spilled in the year-ago Q3. Both line items were much better than analysts had expected. On average, they were modeling revenue of $110.5 million and a per-share adjusted net loss of $1.37.

As with Roku's top line, certain key operational metrics rose precipitously. Here are the highlights:

Metric Total

Year-Over-Year Growth

Active accounts 16.7 million 48%
Total customer streaming hours 3.8 billion 58%
Average revenue per user (ARPU) $12.68 37%

Data source: Roku. 

These jumps can partially be attributed to general trends in the market -- after all, cord-cutting (i.e., abandoning cable/satellite subscriptions for streaming services) is becoming a more popular option for TV watchers. But Roku has also managed to increase its take from advertising, which comprises the bulk of its platform-segment revenue. 

These results made Mr. Market very happy. Roku's stock blasted into the stratosphere the day after the results were unveiled, with its price rising by almost 55% as of this writing.

This Fool's take

Roku has a very sensible strategy for its future, which is to bolster platform revenue. After all, as is typical in the hardware-software mix, software offers much higher margins. For Roku, the gross margin in the platform space was 72% in Q3, far above the 13% of its hardware offerings.

So it's no wonder that investors love the Q3 growth figure for the platform segment (a key reason, I suspect, why the shares popped so high). But as my colleague Evan Niu points out, a fat chunk of Roku usage comes from the Netflix (NASDAQ: NFLX) and YouTube channels; Roku makes little money through these. 

The company said that around two-thirds of its Q3 platform revenue derived from advertising it served on ad-supported channels. It doesn't, however, include either Netflix or YouTube, which means growth in the all-important platform segment depends on the far less popular channels.

That might be an issue. Personally, I've owned and used a Roku for over three years. But I can't remember even one instance in which I or Mrs. Volkman watched, say, The Roku Channel. 

Meanwhile, although the company makes good hardware, it's certainly not the only game in town for streaming devices. There are a raft of set-top boxes available on the market, and most have broadly the same features as the current Rokus. And yes, you can do your Netflix binge-watching or YouTube cat-video surfing through these devices, too.

At the end of the day, while Roku's inaugural earnings report was justifiably a hit, I'd give the company's shares a miss. In my opinion, there are better ways to invest in streaming -- say, with a set-top-box maker that has successful operations in other hardware segments like Apple, or a pure-play content provider such as Netflix. For me, using Roku only for my video entertainment needs will be sufficient for now.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.