Roku Inc. investors jittery about the company’s financial expectations for the year should see the silver lining in that cloudy forecast: The story Roku has been selling investors remains intact and is headed for a major milestone.
Roku ROKU, -17.06% reported only its second quarterly profit Wednesday, but the results were overshadowed by a lower-than-expected profit forecast for the first quarter and 2018. Roku shares — which had more than tripled since it went public in September, as the Dow Jones Industrial Average DJIA, +0.82% gained 10.8% — tumbled more than 20% in after-hours trading, and were down about the same amount in premarket trade Thursday.
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Roku forecast a loss ranging from $55 million to $40 million for 2018, on revenue ranging from $660 million to $690 million. According to FactSet, the consensus among analysts before the report was for a loss of $35.9 million, on revenue of $661.5 million.
That miss needs to be seen in concert with two other facts, though. Roku executives admitted in their conference call that its adoption of new U.S. accounting rules accounts for a good portion of the shortfall, with expectations of a gross negative impact of $10 million to net income in 2018. Analysts’ estimates for losses would have likely been larger if they had known that fact before Wednesday’s results.
“I think there is real confusion with the accounting stuff,” said Laura Martin, an analyst with Needham & Co.
More importantly, Roku expects to cross an important milestone in 2018 for the path it has worked hard to illuminate since its IPO roadshow: The platform is the future. Roku said that platform revenue — money it gets from advertising on its streaming service as well as licensing the platform to TV manufacturers and others — is expected to surpass hardware revenue this year.
Martin pointed out that as more of Roku’s revenue shifts to the platform side of the business in 2018, where it has licensing deals to offer its content on TVs and other devices, it will result in much higher profit margins.
“We would take our estimates up, but we can’t because of the accounting change,” she admitted.
Roku said that in the fourth quarter, the platform segment of its business was 45% of total revenue, up from 25% last year. Platform represented 87% of total gross profit in the fourth quarter, up from 65% last year.
“We made significant progress growing our platform gross profit especially through advertising,” Roku Chief Executive Anthony Wood told investors. His comments were echoed by Chief Financial Officer Steve Louden, who said Roku was encouraged by the traction in the platform segment, “as a key long-term driver of robust revenue growth and margin expansion.”
Since its IPO, Roku has talked about striving to be less dependent on the notoriously low-margin hardware business. While the company’s forecast reflects some short-term accounting pain, it also shows that long-term goals are in sight.