Can Roku Be a Tonic for Tech IPOs?

Streaming-TV provider raises roughly $219 million; trading to begin Thursday

Sept. 27, 2017 6:59 p.m. ET

An early player in streaming television is hoping for a stock-market debut that could breathe some life into a faded technology IPO scene.

Roku ’s Inc.’s initial public offering raised roughly $219 million late Wednesday, as it priced at $14 a share, according to a person familiar with the deal. That is the top end of its expected range. A solid trading debut by the maker of media-streaming devices and software would be a welcome reprieve for a slice of the market that has been slow and suffered a pair of big stumbles, casting doubt on the valuations of Silicon Valley startups.

Roku and selling shareholders sold roughly 15.7 million shares, according to a person familiar with the offering, despite some initial reservations from potential investors. At its IPO price, Roku is valued at about $1.3 billion.

Overall, Roku enters a fairly welcoming broader market. Technology stocks are soaring and newly listed tech companies, or those that went public so far this year, are up 32% on average since their debuts compared with roughly 22% average gain for overall IPOs through Tuesday’s close, according to Dealogic. But two notable stumbles—from Snap Inc. and Blue Apron Holdings Inc. —have cast a pall on the tech IPO market. Snap’s shares are trading 17% below their $17 IPO price and Blue Apron’s shares are down 42% from their $10 offer price as of Wednesday’s close.

Jim Callinan, portfolio manager at Osterweis Capital Management, said that at first he was surprised to see Roku choose to go public now because of its reputation as a hardware maker. But when he looked more closely at the company’s evolving business model, he became more intrigued. He attended Roku’s roadshow at the Omni San Francisco Hotel, where executives pitched the firm to roughly 50 money managers and analysts as a company in the process of shifting to more of an advertising revenue model. Also surprising to Mr. Callinan: the company’s user growth.

“This looks a lot better and more reasonable as a story than I’d thought,” he said.

Roku began operating in 2002 and launched the first Roku product in 2008. It became known to consumers as the maker of internet-connected boxes that hooked up to TVs and streamed video from services such as Netflix Inc. In 2014, Roku considered an IPO, but the plans were shelved as it was beginning to transition toward generating more revenue from streaming. The company spent the next few years effecting that shift. Some money managers said the diversification is one reason they are considering the offering.

Roku faces several hurdles—key among them challenges from high-powered competitors offering similar products, such as Amazon.com Inc., Alphabet Inc.’s Google and Apple Inc., as well as from some smart TVs and gaming consoles. Money managers also worry that customers will simply pay a premium for ad-free streaming services. Roku’s revenue is growing, but it still posts net losses—though that isn’t out of the ordinary for startups.

Perhaps working in Roku’s favor is its twist on the typical revenue model for streaming services. It generates revenue from both the sale of streaming players and from advertising and subscription revenue sharing on its platform. Ad revenue represented about two-thirds of Roku’s so-called platform revenue in the first half of 2017, according to a regulatory filing. Roku also licenses its software to smart TVs, which provides another revenue stream.

During its IPO roadshow over the past week, executives spoke about Roku’s unique position in relation to other pay-TV providers such as Comcast Corp. or AT&T and how, with more than 15 million active accounts, it would be the fourth-largest multichannel video distributor in the U.S. in terms of users, according to people in attendance.

Roku still makes the majority of its revenue from sales of streaming players, or $117 million of the $199.7 million in revenue it reported for the first half of 2017. Yet streaming players accounted for a smaller portion of sales than in the year-ago period when they accounted for 73% of overall revenue.

The company said in the filing that it intends to grow profit by increasing the number of active accounts and how much it makes from each user. As of June 30, Roku said it had 15.1 million monthly active accounts, up from 10.6 million in the year-ago period, according to the filing.

Roku, which has yet to make a profit, disclosed its loss for the first half of the year had narrowed to $24.2 million, while revenue rose 23% to $199.7 million.

As of June 30, the company had accumulated $244 million in losses.

The company, which listed among risk factors the potential loss of Mr. Wood, said last month it had raised his base salary to $1 million, from $750,000.

Roku’s executive officers, including Mr. Wood, are at-will employees.

Current investors include 21st Century Fox Inc., which shares common ownership with Wall Street Journal owner News Corp .

Roku, which has yet to make a profit, receives the majority of its revenue from sales of streaming players. That represented $117 million of the $199.7 million in revenue it reported for the first half of this year.

However, the company has been shifting its business to draw more of its revenue from ads and subscription-revenue-sharing deals. The company said it had 15.1 million active accounts as of June 30. Average revenue per user from ads and subscription services was $11.22, above the $9.28 figure in 2016, it said.

In 2016, Roku posted $398.6 million in revenue, up 25% from $319.9 million in 2015.

The company said it plans to use net proceeds from the offering for general corporate purposes, including working capital, research and development, sales and marketing activities and capital expenditures.

Following the offer, Chief Executive Anthony Wood will hold a stake of about 27.3% but will control 32.1% of the voting power, the company said.

21st Century Fox Inc., which shares common ownership with Wall Street Journal owner News Corp , is an investor in Roku. Roku also counts Sky PLC, Hearst Corp., Fidelity Investments, Menlo Ventures and Globespan Capital Partners as investors.

Roku earnings: After IPO, these are the numbers to watch

Nov. 8, 2017

Roku Inc. executives have been very clear during and since the company’s initial public offering: The company’s success lies in its video platform, not the streaming gadgets for which it is largely known.

Chief Financial Officer Steven Louden, on the day of Roku’s Wall Street debut, said that software represents 80% of the company’s gross profit as of the second quarter. Chief Executive Anthony Wood recently told MarketWatch columnist Therese Poletti in an interview that Roku is his chance to build a new platform for television, which he said was his goal even as he was introducing the world to the first digital video recorders.

When Roku announces earnings for the first time since its IPO on Wednesday after markets close, it will likely focus more on the platform and the money it brings in than sales of the streaming devices, which are still a majority of the company’s revenue. The Roku platform makes money in three main ways: Advertising, revenue-sharing and licensing.

Ads drive about two-thirds of Roku’s platform sales, as the company sells ads to place in the Roku home screen or on its free ad-supported movie channel. Revenue sharing comes from agreements for content and subscriptions purchased via its software, much as Apple Inc. AAPL, +0.53% keeps a chunk of the money spent to subscribe to services or buy apps in its App Store. Lastly, about 5% of the platform revenue comes from licensing Roku tech to other companies—largely, that means TV makers, which run Roku’s software to offer streaming without a separate gadget.

Platform and player revenue are getting close to equal as Roku brings down prices on its players to get more users to the platform, and analysts expect it to grow fast. In a note to clients in October, Oppenheimer analyst Jason Helfstein said that Roku is “poised to benefit from the secular shift of linear TV viewing” to streaming on demand, and predicted platform revenue will rise to $745 million by 2020.

“With the shift in Player margins embedded in the model, Roku can focus on driving high-margin platform/advertising revenue by leveraging control over the home screen and superior audience analytics versus linear TV to create a three-sided marketplace: users, publishers and advertisers,” Helfstein, who rates Roku stock as perform, wrote.

Earnings: Analysts polled by FactSet expect third-quarter losses to widen to $21.2 million or 28 cents a share compared with $12.7 million in the year-earlier period.

Revenue: Analysts model sales of $110 million compared with $89 million in the year-earlier quarter, though the models do not include separate overall estimates for player and platform, according to FactSet.

What analysts are saying: RBC Capital Markets analyst Mark Mahaney expects platform revenue to rise 120% to $53 million in the third quarter, compared with the year earlier quarter.

“The company is attacking a very large $70 billion TV ad spend that should migrate to [over-the-top streaming],” Mahaney wrote in a research note to clients Monday. “We believe Roku can sustain robust growth in both active accounts and total hours streamed, allowing it to keep its leading share and increase negotiating leverage with content/channel providers.”

Mahaney expects Roku to reach 15.8 million active accounts, and total hours streamed to rise to 3.8 billion, a 58% increase from the year-earlier period. He expects average revenue per user of $11.82, up from $9.26 in last year’s third quarter.

Though Roku’s platform is the focus of executives and most investors, its player revenue remains a significant driver of business. Mahaney expects player revenue, which declined 11% in the second quarter compared with the year-earlier period, to drop 10% to $58 million in the third quarter.

Executives have said that in the past that streaming gadgets are more of a customer acquisition cost, though not a money-loser. Even though revenue hardware sales have dipped, the company is actually selling more gadgets. Mahaney rates the company a buy with a $26 price target.

One other thing to watch for is news on Roku’s troubles in Mexico. A Mexican court has blocked device sales altogether in the country because hackers were using them to stream pirated content from the likes of HBO and ESPN. Roku is fighting the judgment, and in the company’s S-1 filing with the Securities and Exchange Commission, executives said a second-quarter write-down of its inventory cost $1 million, as well as a $700,000 for sales incentives.

“Our involvement in this litigation, or similar legal matters in the future, could cause us to incur significant legal expenses and other costs, and be disruptive to our business,” the filing said and it’s possible executives will provide an update on the third-quarter call.

Sales of video doorbells are growing faster than for any other home device, with Ring the leader. Formally Bot Home Automation Inc., the company expanded into security cameras and floodlights. And Siminoff’s hiring spree in March brought him a team tasked with syncing more devices to Ring’s monitoring app.

But with no profit, $209 million in venture capital and a valuation of around $460 million, Ring faces a massive challenge in trying to outlast better-funded imitators.

Roku Inc's shares surged nearly 43 percent to a record high on Monday after the streaming device maker said it signed a licensing deal that would put its technology on Philips-branded televisions in the United States this year.

The company said the licensing partnership with Japan's Funai Electric Co Ltd, which manufactures Philips N.V. televisions for North American, would place its operating system on Philips' smart TVs.

Roku also said that it would give a $20 discount on its $69.99-priced streaming stick for the Black Friday weekend, and separately said its customer would get a free one-month trial of AT&T Inc's streaming service DirecTV Now.

Roku's CEO is now a billionaire after the stock soared 70 percent since earnings

• Roku has spiked more than 70 percent since market open Thursday as investors jumped on the company's first earnings report since going public in September.
• CEO Anthony Wood owns 27.3 percent of outstanding common stock.
• The stock closed Monday at $42.71, putting the company's market cap at $4.15 billion.

Roku's (NASDAQ: ROKU) third quarter was good, but not this good. Shares have now more than doubled in the three trading days since Roku's first earnings release as a public company. It's also not as if there has been a string of other positive news, other than an announcement today that Japan's Funai Electric, which makes TVs under the Philips brand, has joined Roku's TV licensing program and will soon integrate Roku's TV streaming platform. That's undoubtedly good news, but probably not worth the $925 million that Roku added to its market cap today.

Is a potential short squeeze -- in which short-sellers buy back shares -- what's driving the gains?

The case for a short squeeze

It's always hard to say for sure if a short squeeze is occurring, but here's what we know.

Roku's capital structure includes 18.1 million Class A shares and 79.7 million Class B shares, the sum of which determine Roku's $4 billion market cap. But only those Class A shares trade publicly, while Class B shares are held by insiders and convert to Class A once the insider wants the sell. Besides, those Class B shares are all bound by lock-up agreements for six months following the IPO, according to the prospectus.

The float is what matters here as it relates to price fluctuations, and we can say Roku's float is less than 18.1 million shares. MarketWatch estimates Roku's float at 15.7 million shares. At the same time, there were 4.8 million shares held short at the end of October, so short interest represents a whopping 30% of float.

Days to cover at the end of October was about 2.4 days, which suggests that it would theoretically take that long to cover all short interest if all trading activity was covering short positions. However, that was based on average daily share volume of 2 million shares, while volume over the past three days has averaged 40.1 million shares, rendering that days-to-cover figure less meaningful.

Shares are still considered hard to borrow, and on Friday borrowing costs were around 20%. I just inquired with my broker-dealer again near the close and was told to expect borrowing costs tomorrow morning to be approximately 25%, so the costs associating with maintaining a short position are still fairly elevated. Borrowing costs are quoted as an annual rate.

Is a pullback in store?

The important thing here is that if a short squeeze is indeed occurring -- which could be confirmed once the next official short interest figures are released if shares held short falls meaningfully -- then the gains are not being driven by fundamentals. As such, the gains may not be sustainable if shorts are just temporarily pushing shares higher as they cover their bearish positions.

For prospective investors that could be interested in buying in, it might be worth waiting to see if prices pull back. As stretched as the valuation looked before, shares look that much more expensive after the past three days. The stock nows trades for over nine times sales at this point -- for a company that still has meaningful hardware operations. Media players still comprise two-thirds of revenue, even though the platform is the real money maker.

Investors should always exercise caution when a stock puts up these types of gains in such a short period of time, and Roku is no different.

Roku earnings: A major transition could be here

May 9, 2018

After the bell Wednesday, Roku is expected to report that the company’s streaming platform outperformed its hardware in a quarter for the first time, highlighting the investment thesis that executives sold in the company’s initial public offering. Analysts expect hardware sales of $60.3 million and platform revenue of $66.7 million — nearly double what the company reported for platform-related sales in the year-earlier quarter.

Platform revenue includes advertising revenue, content and licensing deals, with ads accounting for more than two-thirds of the segment, while hardware includes Roku’s line of dongles, set-top boxes and other streaming gadgets. The reason platform is the company’s focus is obvious: margins are much fatter. Analysts model platform gross margin of $49 million, compared with $6.3 million for hardware.

Executives have said on several occasions that they work to optimize hardware pricing against volume — lower prices often result increased unit sales. While Roku has said it expects to continue to generate gross hardware profit, deep discounts continue to be a part of the company’s moneymaking customer acquisition strategy.

Earnings: On average, analysts polled by FactSet project expect adjusted losses of 15 cents a share and GAAP losses of 16 cents a share. Contributors to Estimize predict losses of 13 cents a share.

Revenue: For the first quarter, analysts estimate sales of $128 million. Analysts expect Roku to add 5.7 million new users. Estimize contributors expect sales of $129.2 million.

What else to look for

KeyBanc Capital Markets analyst Evan Wingren wrote in a note to clients Monday that investors should keep an eye on the Roku Channel, an ad-supported free station available on the company’s TV operating system. Wingren said that at the moment it is in its infancy, the channel has the potential to capture a “growing portion of library content” and is one of the “few scaled streaming applications.”

Roku’s licensing program, which it bundles into the platform revenue segment, also puts the company in a unique position versus competitors such as Amazon.com Inc., Alphabet Inc., and Apple Inc. because its software is built into televisions. Licensing the company’s tech also positions it to acquire new users via TV purchases, wrote Wingren.

“New OEMs will increase the number of [TV models]containing Roku TVs, which would likely translate into increasing adoption by consumers and further cement Roku’s leadership in TV operating systems,” Wingren wrote. “To the extent that Roku branded TVs continue to gain share, it would place incremental pressure on the market share of OEM non-licensees like LG and Vizio to potentially integrate the Roku OS into SKUs of their TV offerings.”

In the long run, Wingren wrote that Roku is in a position to take advantage of the slow shift in video consumption from traditional TV and cable to the internet, even though online viewing isn’t typically ad-supported.