This Could Be the Most Important News Roku Investors Hear This Year


The past several years have been rife with uncertainty for Roku (ROKU -2.98%) investors. After peaking in mid-2021, a perfect storm of supply chain issues, macroeconomic headwinds, and a significant slowdown in television advertising conspired to bring down the one-time Wall Street darling. Roku spent much of last year reacting to the harsh conditions by continuing to grow revenue — albeit more slowly, addressing logistics issues, and slashing costs.

In a regulatory filing on Tuesday, Roku’s management laid out plans for more job cuts, additional restructuring, and further reductions to its operating expenses. If that wasn’t enough, the streaming pioneer significantly increased its revenue guidance for the third quarter, assuring investors that its turnaround is gaining steam. 

A group of young friends sitting on the floor watching television.

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Roku’s cost-cutting campaign

Roku announced it would cut an additional 10% of its workforce, or roughly 360 people, marking the third round of employee reductions in the past year and the steepest cuts yet. The company eliminated 200 positions in November and another 200 in March. In all, Roku has reduced its headcount by nearly 20% since late last year. As a result of the most recent cuts, the company expects to record a restructuring charge, primarily the result of severance and benefits payments, in a range of $45 million to $65 million.

However, management isn’t limiting its cost-cutting initiative to employee reductions. Roku has plans to reduce expenses across a wide swath of its business. The company will restrict new hires, reduce and consolidate office space, and cut costs from outside services. The charges associated with these steps are expected to be in the range of $160 million to $200 million.

Finally, Roku will “perform a strategic review of its content portfolio.” This will result in the removal of certain licensed content from its streaming platform — most likely the programming that isn’t living up to expectations or drawing the audience the company anticipated. The associated impairment charge will range from $55 million to $65 million.

While the various restructuring and impairment charges will weigh on Roku’s results in the short term, these moves will better position the company for future success.

An advertising rebound?

Perhaps more important to investors was the announcement that Roku is boosting its guidance for the third quarter. The company now expects net revenue in a range of $835 million to $875 million, which would represent year-over-year growth of between 10% and 15%.

For context, management originally forecast revenue of $815 million, or growth of about 7% year over year, so the just-announced guidance is a significant improvement compared to its expectations when Roku reported its second-quarter results in late July. 

The bulk of its revenue comes from the 20% cut it receives from any advertising shown on its platform. The company’s increased guidance suggests that the long-awaited recovery of the advertising industry is gaining steam. Roku stock rallied when the company reported better-than-expected second-quarter results, so the increased guidance provides further evidence that the ad market is rebounding.

The news gets better. Excluding the various restructuring and impairment charges noted above, Roku now expects adjusted EBITDA in a range of negative $40 million to negative $20 million. While that might not seem like a reason to celebrate, management originally called for a loss of $50 million, so this is a significant improvement. 

The big picture

Roku is the leading streaming platform, reaching the living room by way of streaming dongles, set-top boxes, and connected TVs, and the company is well-positioned to benefit from this ongoing secular tailwind.

Advertisers simply can’t ignore Roku’s reach, with over 73 million active accounts, more than all the major pay-TV providers combined. The company’s results have been hampered over the past couple of years by the dip in ad spending. The combination of growing revenue and reduced expenses should help Roku return to profitability sooner rather than later, which will no doubt be a boon to shareholders.

Finally, at just 3 times next year’s sales, Roku stock is a steal ahead of the expected recovery. 

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