Over-the-top (OTT) streaming TV platform Roku (NASDAQ: ROKU) reported third-quarter earnings last night, and while the results came in ahead of expectations, soft guidance for the fourth quarter utterly crushed the stock . However, the company is making progress growing other pertinent operating metrics like active accounts, while the player segment continues to decline in relevance amid Roku's ongoing shift to its platform business.
Here's what investors need to know.
The Roku Channel. Image source: Roku.
Platform revenue hits a new milestone
Revenue in the third quarter rose 39% to $173.4 million, including $100.1 million in platform revenue and $73.3 million in player revenue. After hitting an inflection point earlier this year, when platform revenue exceeded player revenue for the first time, the platform segment represented 58% of revenue this quarter. This was also the first time that quarterly platform revenue topped $100 million, hitting a new milestone. Platform gross margin expanded to a healthy 70.5% sequentially.
It's now been about a year since the launch of The Roku Channel, Roku's first-party ad-supported channel that is the backbone of its advertising business. Video ad sales more than doubled year over year and have been driving ad revenue growth in recent quarters. Those ads enjoy gross margin in excess of 50%, the company says.
Data source: SEC filings. Chart by author.
On the player front, Roku's most affordable devices are still driving unit volumes while also pinching margins. Unit volumes were up 15%, while average selling prices (ASPs) fell 5%. Player gross margin was nearly cut in half on a sequential basis, falling to 11.5%, down from 22.2% in the second quarter. Over half of new accounts continue to be generated from licensed sources -- TVs sold by third-party manufacturers that integrate Roku's platform. The company estimates that over 25% of all smart TVs sold in the U.S. are Roku TVs.
Roku added 1.8 million active accounts during the quarter, bringing its total to 23.8 million. There were 6.2 billion hours of content streamed on the platform, and average revenue per user (ARPU) increased to $17.34. As a reminder, the company reports ARPU as a trailing-12-month figure derived from platform revenue divided by active accounts, making it different from how other companies traditionally define ARPU.
Costs are still rising rapidly, with operating expenses increasing 57% to $90.7 million. That led to an operating loss of $11.7 million, and a net loss of $9.5 million, or $0.09 per share.
Guiding to a loss
The real kicker was guidance. While Roku raised its guidance regarding revenue growth -- now expecting full-year revenue to increase 42%, up from its prior forecast of 40% -- there's a good chance that the company will post a net loss during the quarter. Analysts were modeling for profitability. Roku is forecasting a net loss of $4 million to a net profit of $3 million, while the consensus estimate called for $7 million in black ink.
Short-term disappointment aside, Roku is right to focus on investing in long-term growth. Its rising costs are primarily attributable to hiring, particularly in areas like ad sales and business development. The company will provide more details around its 2019 forecast when it reports fourth-quarter earnings in February.
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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .