After a blockbuster earnings report, Roku's CEO explains why its advertising business is exploding (ROKU)

Roku CEO Anthony Wood

Roku announced second-quarter results on Wednesday that topped Wall Street's expectations and helped boost its stock as high as 9% in after-hours trading.
The company's advertising business helped drive the results.
Roku is benefitting from a long-term strategy to translate the success of its digital media players into creating a platform for advertising, company CEO Anthony Wood said.

Roku's evolution from being a seller of inexpensive streaming video boxes, to being a significant player in the world of video advertising, took another leap forward Wednesday.

The company announced much better-than-expected second-quarter results, driven largely by its so-called platform business. Among other things, that business involves selling ads that will run on the millions of Roku video players smart TVs in use.

The company is benefitting from the growing number of consumers who are watching video streamed from the internet and the growing number of hours of streaming television they're viewing, company CEO Anthony Wood told Business Insider.

"The shift to streaming is really happening," he said. "It's a big opportunity for us."

Investors cheered the results. In after-hours trading, the company's stock shot up as much as 9%. In recent trading it was up $3.95, or 8%, to $51.20.

Roku's ad business is taking off

Roku got its start by selling media players that allowed consumers to watch Netflix on their televisions. The company now offers a whole line of such devices and those gadgets now let consumers stream thousands of online channels. It also licenses its software to television manufacturers and pay TV providers for use in their set-top boxes.

But its goal has always been to be more than a device maker or software provider, Wood said. The company always planned to create a direct relationship with consumers and build its business around that relationship, he said.

Roku now has 22 million active customer accounts. That's up from 20.8 million in the first quarter, and 15.1 million in the second period last year. The company has been able to grow that number by selling more of its streaming players and convincing more consumers to buy smart TVs with its software — and then convincing those consumers to sign up for Roku accounts.

With Roku accounts, consumers can download new channels to their devices and TVs, rent movies, or purchase programs. The company gets something too: detailed data on the viewing habits of those customers, allowing it to target ads at them.

Roku has long sold interactive ads that run in its user interface, promoting channels or particular videos. But it's increasingly selling video ads that run before, during, or after the videos that are streamed through its service. And it's selling those ads on a growing number of the channels users watch through its players and TVs.

Its also attracting a fair number of advertisers. More than half of the top 200 advertisers listed by Ad Age now advertise via Roku, Wood said.

"It's a mainstream ad business," he said.

The company's seeing success with its own streaming channel

Thanks in large part to its advertising efforts, Roku's platform business has been growing rapidly and now accounts for more revenue than sales of its devices. In the second quarter, the platform business grew 96% from the same period a year ago to $90 million.

Part of the reason for that is that Roku is growing the amount of money it's bringing in per user. On a trailing 12-month basis, Roku it garnered $16.60 per user, as of the end of the second quarter. A year ago, that figure stood at $11.22 per user.

The platform business "is obviously hitting its stride," Wood said.

Roku is also making a push to be something of a streaming provider in its own right. In September, it launched the Roku Channel, an ad-supported streaming service that offers a collection of TV shows, live news feeds, and movies. The channel has since become one of the top 5 most watched among Roku's active users. And the company is hoping to attract even more users, announcing Wednesday that consumers can watch it via a web browser on their computers after signing in with a Roku account.

To be sure, Roku still gets much of its revenue — some 42% in the second quarter — from selling devices. That business has started to slow down as smart TVs have become more common.

And for all the success of the Roku Channel and all the thousands of channels Roku offers through its service, Roku customers still spend a disproportionate amount of time watching one particular service — Netflix.

"No one's even close," Wood said.

That dependency on Netflix poses a potential threat to Roku. Consumers could see little harm in potentially replacing their Roku boxes for other devices or smart TVs, since nearly every internet-connected video box offers Netflix.

But Roku has been decreasing its dependency on Netflix over time, Wood said. Netflix viewing has gone from 100% of Roku users streaming to less than a third today, he said.

What customers watch "is diversifying as people stream more," he said.

Roku's blew the doors off Wall Street's expectations

Regardless, the company had a lot to crow about on Wednesday. Here are how its outlook and results compared to Wall Street's expectations:

Revenue (Q2): $156.8 million. Analysts were expecting $141.5 million.
EPS (Q2): 0 cents a share. Wall Street was looking for a loss of 14.6 cents a share.
Revenue (Q3 forecast): $164 million to $172 million. Analysts had previously predicted it would post $166.5 million in sales in the third quarter.
Net loss (Q3 forecast, non-GAAP): $3 million to $8 million. Wall Street's prior estimate was an adjusted net loss of 11.6 million for the period.

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