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The Blockbuster Announcement Hidden Away in Roku's Earnings Release -- and Why It's a Big Deal

Danny Vena, The Motley Fool

After a run that saw its stock gain 234% so far in 2019, investors had expectations going into Roku's (NASDAQ: ROKU) second-quarter financial report. Shareholders got all they hoped for and more when the streaming pioneer reported better-than-expected results that pushed the stock up more than 20% on the day following the earnings release.

Roku generated revenue of $250.1 million, up 59% year over year, resulting in a net loss per share of $0.08. Both numbers were far better than analysts' consensus estimates, which were calling for revenue of $224.2 million and a loss per share of $0.22.

As tantalizing as the results were, there was a short entry tucked away in Roku's shareholder letter that wasn't widely reported, and it could have big implications for the company's future success.

The Roku Channel showing on a connected TV with available premium subscriptions like Showtime and Starz.

Image source: Roku.

Just two lines

While most investors were rightly focused on Roku's top- and bottom-line results, the company slipped a short missive into its shareholder letter than many may have missed:

We recently agreed with Walmart (NYSE: WMT) to offer several new Roku devices including audio products to their customers under their Onn brand. This is in addition to Roku TVs and Roku players already sold through Walmart.

This seemingly innocuous announcement would have a big impact on Roku's future success, but not for the reason you might think.

A little background

While many manufacturers took the easy path, using a modified mobile operating system (OS) to power their connected TVs, the Roku OS was built from the ground up, specifically designed for the task. As a result, the company has a growing list of manufacturers that license the system to include it in their connected TVs, rather than spending precious resources to develop their own. This partner list includes TCL, Sharp, Philips, RCA, JVC, Hitachi, and more.  As a result of these deals, Roku's OS can now be found in more than one in three connected TVs sold in the United States.

While investors might associate Roku with its streaming players, dongles, and connected TVs, they shouldn't make the mistake of thinking that's how the company makes money. Since early 2018, Roku has made the lion's share of its revenue from its platform segment, which mostly consists of advertising. While the company makes very little from its player segment, it's still an important part of Roku's overall strategy.

A path into the living room

Roku made the decision several years ago to forgo much of the profit from the player segment to focus on account growth and advertising revenue. By getting its players and connected TVs in front of as many consumers as possible, it increases the number of active accounts and ultimately the number of people that see the advertising it serves up. This also increases the amount of data Roku derives from its viewing audience, which helps make its ads more effective.

This move has proven hugely successful. Roku's platform revenue now comprises 67% of the company's total revenue and grew 86% year over year in its most recent quarter. At the same time, active accounts grew to 30.5 million, up 39% from the prior-year quarter, while streaming hours of 9.4 billion grew by 72%.

A Roku TV showing viewing options.

Image source: Roku.

Here's why it matters

With Walmart's scale and incredible reach within the low-cost segment of the market, this is truly a match made in heaven. Lower income consumers will be more likely to purchase an inexpensive connected TV -- like Walmart's Onn brand -- and they're also more likely to watch ad-supported services like The Roku Channel.

This partnership will help Roku's growing penetration. With 30.5 million active accounts and a population of about 128 million households in the U.S., the company can now reach about one of every four U.S. consumers, and that number will only continue to grow with each passing quarter. 

Danny Vena owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com