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Platform GM will continue to be “low 60’s“ into Q4. They will probably trend to low 60’s or high 50’s. This is due to revenue mix.

Ads are going to be a bigger and bigger part of Platform Revenue and ROKU has said at every release that ads have a 50+% margin.

The other mix is what they call “premium subscriptions” which is what they call HBO, Showtime, Acorn, EPIX, etc that are subscribed to inside the ROKU Channel. ROKU acts as the “wholesaler” in this type of subscription service similar to the way a cable channel does and Hulu does as well. The revenue acquired this way is accounted as a “Gross” item, where ROKU recognizes the totality of consumer payment. Then remits the publisher portion as a Cost of Goods Sold on the balance sheet. This means there is a lot of pass through revenue for this type of subscription. It produces the same $ amount of gross profit but the margin is lower due to the pass through.

The other type of subscription is when you sign up via the publishers individual channel(AKA app)on the ROKU platform. Like for Netflix or Hulu or Disney+ and also for HBO etc using that app and not the Roku Channel. This type of relationship Roku recognizes only their “Net” share on the balance sheet. Again for the same transaction they get the same $ dollar amount of gross profit at a higher margin because there is no pass through.

With the rising popularity of the Roku channel, the mix may shift to more of the “Gross” type subscription revenue. Margins may see pressure from this but Gross Profit dollars will go up the same regardless. ROKU would argue that having this option in the Roku channel drives more subscriptions than they would capture otherwise so this helps drive gross profit in the long run. Sounds weird, but they are sacrificing Gross Margin for more Gross Profit.

Here is the excerpt from last quarter where they explain what I wrote above. Took me almost 3 months to figure this statement out.

Let me hit the rev rec question. So without talking about any particular deal, there are two types of ways to recognize the revenue, if it’s in the subscription services app and it’s part of a multi-element content distribution deal then the subscription rev share there would be a net treatment. So we would just recognize the portion of that monthly fee that we get in terms of our revenue share. And that’s traditionally how we’ve done it and it’s consistent with part of the content distribution revenue recognition and that can be lumpy over time, because we don’t recognize that as it’s incurred, it’s part of the deal value and your expectations on the deal value can change quarter-to-quarter. I will contrast that by saying in general the premium subscription business, which we have within the Roku Channel, so if a SVOD service was part of that and we have 40 plus premium subscription partners within the Roku Channel then because we’re effectively the wholesaler there, then we recognize that on a gross revenue basis, say the total monthly consumer cost of that is revenue and then the COGS are what we pay back to the content owner. So that’s a gross revenue treatment versus the net revenue treatment before, both are good models in terms of driving incremental gross profit for Roku but they’re treated very differently.

That explains the mix and GM regarding subscriptions. Also subscription recognition is lumpy because it is 606 accounting and ROKU is paid by the deal. So they have to recognize a large portion of that when it is priced. It involves estimating the number of sign ups and subscribers over the lifetime of the deal along with other services the publisher wants to buy. And then when certain performance obligations are met they reformat the deal which triggers additional payments. Those performance obligations can occur at less than predictable times.

Next post I’ll try to explain why overall Ad revenue has around a 50+% GM. It’s also due to pass through I believe.

Darth
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