Earnings Results: Roku stock falls after coronavirus drives increase in advertising cancellations

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Roku Inc. saw an increase in advertising cancellations due to the COVID-19 crisis but still expects to record “substantial” ad-revenue growth for the full year.

Shares of the streaming-media company ROKU, +7.82% were down 10% in after-hours trading Thursday after Roku reported revenue that was slightly ahead of its April pre-announcement but cited a “mixture” of impacts on the platform business amid the coronavirus outbreak.

Roku saw first-quarter streaming hours grow to 13.2 billion from 8.9 billion a year earlier. The number of active accounts on Roku’s platform climbed to 39.8 million from 36.9 million in the fourth quarter and 29.1 million in the prior-year first quarter.

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It also disclosed that viewership and account growth accelerated in April as the number of active accounts grew about 38% from a year earlier while the number of new accounts rose by more than 70%. Streaming hours climbed by about 80% on a year-over-year basis.

Purchases of subscription streaming services through the Roku platform have increased since mid-March, the company said in its earnings release, but Roku has also seen “higher-than-normal cancellations as overall advertising budgets have declined.” These have been partially offset by shifts in ad spending to the Roku platform from traditional budgets, according to the release.

Needham analyst Laura Martin wrote prior to the report that 50% to 80% of cable and broadcast prime-time advertisements for national television are bought “upfront” from May to August for the upcoming television season that kicks off in September. There’s uncertainty about what will happen to the ad-buying process due to production delays and constrained ad budgets, which Chief Financial Officer Steve Louden said could ultimately benefit Roku.

“The fact that the ‘upfront’ process is being disruptive provides further catalyst for advertisers” to move their budgets away from linear television, Louden told MarketWatch.

He said that parallels to 2008 may not be a “perfect analogy” but that the financial crisis accelerated declines in print advertising, and that business never recovered even as ad budgets rebounded. “It will be interesting to see if a similar trend happens here with linear TV,” Louden said.

There’s also potential for disruption in the premium television on demand market as studios like Comcast Corp.’s CMCSA, +1.25% Universal experiment with direct movie releases to consumers. This “potentially sets the precedent for breaking down the windowing concept in Hollywood,” Louden said, referring to the customary agreement between studios and theater operators that delays when films can become available for digital release.

Roku posted a net loss of $54.6 million, or 45 a share for its first quarter, compared with a loss of $9.7 million, or 9 cents a share, in the year-earlier quarter. Analysts surveyed by FactSet had been expecting 46 cents.

Roku posted revenue of $320.8 million, up from $207 million a year prior, while the FactSet consensus was for $305 million. The company had previously disclosed in an April update that it expected first-quarter revenue of $307 million to $317 million and a net loss of $55 million to $60 million.

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Sales for the first quarter consisted of $88.2 million from the player business and $232.6 million from the platform business, which includes advertising and licensing revenue.

The company is “committed to [its] strategic investment areas and to extending [its] competitive advantages,” according to the shareholder letter. “At the end of Q1, however, we took steps to slow the rate of growth of our operating expenses and capital expenditures, so progress may be slower.”

Roku still expects that the pandemic could “accelerate [its] path to greater platform scale” as more people may become comfortable streaming TV content.

Roku’s report comes as others in the streaming universe cited boosts in engagement from viewers confined to their homes due to the COVID-19 outbreak. Netflix Inc. NFLX, +0.52% added nearly 16 million subscribers in the first quarter, marking its largest quarter of additions in the company’s history, and Walt Disney Co. DIS, +4.64% topped the 50-million subscriber mark with its Disney+ service less than six months after the offering first debuted.

Shares of Roku have added nearly 11% in the past three months as the S&P 500 SPX, +1.15% has fallen about 13%.

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