Roku Inc. disclosed its most profitable quarter yet in an earnings report Wednesday, but Chief Executive Anthony Wood revealed in an interview that memory shortages cut into its earnings, a fact that could have been a factor in a disappointing forecast.
Roku ROKU, -0.16% was forced to spend more money on expensive air shipping instead of ocean freight to get NAND memory chips for its signature hardware, Wood told MarketWatch in an interview late Wednesday, after Roku’s earnings conference call. NAND flash memory is used for storage on a wide range of electronics — such as smartphones, laptops and desktop computers — and rising prices and shortages have roiled the tech industry in the past year while boosting producers like Micron Technology Inc. MU, -0.80%
Net revenue for Roku’s line of streaming dongles and boxes dropped to $102.8 million in the fourth quarter from $110 million in the year-earlier period, and gross profit on the units fell to $9.7 million from $15.7 million. In part, the drop in profit is related to the company’s price cuts. Executives cut the price for one of Roku’s top-end models to $100 from $130, for example, and released a budget $30 version called the Roku Express.
But Wood also said that due to industrywide NAND flash memory shortages in China, the company has had to spend more money to fly inventory to the U.S. instead of using ocean freighters to ship products — thus cutting into the bottom line.
“We worked through most of that,” he told MarketWatch. “So the working through it often involved airfreight from China. We always planned for shipping on boats, and whenever there are component shortages we ship by planes, and planes are expensive.”
Roku would not say that a forecast that predicted wider-than-expected losses in 2018 was due to the costs for memory, but the projections seemed to be a bone of contention for investors. While the company’s profits were a surprise, shares still plunged more than 20% in late trading, giving back a healthy chunk of large gains since the company’s initial public offering last year.
Hardware sales may incrementally have less of an effect on revenue for Roku, however. As executives have said in the past, they see the hardware as a customer-acquisition strategy and want to sell more of it through competitive pricing. Roku grew its unit volume 8% in the fourth quarter, compared with the year-earlier period, while overall hardware revenue declined.
Sales of the streaming dongles are slowly being eclipsed by platform revenue, which is a mix of ad sales, revenue sharing from content deals and licensing its technology to TV makers. Executives said for the first time Wednesday that platform revenue will make up the majority of the company’s top line throughout 2018.
Roku’s license sources, for example, delivered more than half of the company’s new user growth in the fourth quarter, executives said. Advertising remains the largest component of platform revenue, accounting for 75% of that segment, versus 66% in the previous quarter.
Wood said that data is one of the ways the company adds value for advertisers and the company wants to create a “world class” platform it can leverage when selling and distributing ads.
Chief Financial Officer Steve Louden has previously told MarketWatch that the company’s CPM pricing starts at $30, and goes up from there as the company adds more advanced targeting and interactivity. Wood said the company does not give guidance on CPM prices.
Roku stock closed down a fraction at $51.10 during the regular session. Before Wednesday’s after-hours decline, Roku stock had gained 39% in the past three months as the S&P 500 index SPX, -0.55% rose 5%.