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Roku stock is dropping by over 25% in mid-day trading following the release of the company’s financial results covering the second quarter of the 2022 fiscal year as net losses widened beyond the market’s expectations.

During the three months ended on 30 June, Roku reported total revenues of $764.4 million with Platform revenues accounting for the bulk of that figure and experiencing a 26.5% jump compared to the same period a year ago.

Meanwhile, the top-line performance of the Player segment – the one that includes the sale of its Roku TV devices – was negative as sales experienced a 19.1% year-on-year drop to $91.24 million.

“Reduced consumer discretionary spend is pressuring many verticals including TV and player sales”, the management team explained.

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They added: “Consumers began to moderate discretionary spend, and advertisers significantly curtailed spend in the ad scatter market (TV ads bought during the quarter). We expect these challenges to continue in the near term as economic concerns pressure markets worldwide”.

Roku’s net sales went up by 18% to $764.4 million aided by the positive performance of the Platform segment. However, they fell short of analysts’ consensus estimate for the period by approximately 5%.

The number of active accounts for Roku went up 14% on a year-on-year basis while streaming hours jumped 19% compared to a year ago. However, on a sequential basis, this metric experienced a mild 1% decline.

Meanwhile, negative gross profit margins on the player segment widened as they ended the quarter at minus 24.1% or 18.1 basis points higher than a year ago. As a result, gross margins went down 6 basis points on a year-on-year basis to end the period at 46.5%.

Roku’s Negative Top-Line Margins Result in Wider Net Losses

The increasingly negative profitability of this business segment weighed on Roku’s operating losses as they more than quadrupled during this second quarter compared to the previous quarter as the firm shed $110.5 million. Meanwhile, net losses stood at $112.32 million and minus $0.82 on a per-share basis (fully diluted).

These losses exceeded analysts’ consensus estimate by over 19% as per data from Capital IQ and they could partially explain why shares are declining so sharply following the release of this report.

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“We are in an economic environment defined by recessionary fears, inflationary pressures, rising interest rates, and ongoing supply chain disruptions. For the second half of the year, we are forecasting that advertising spend, particularly in the scatter market, will continue to be negatively impacted”, Roku’s management commented in regards to the firm’s outlook for what remains of the year.

In addition, the management team expects that discretionary spending will remain relatively capped and this could continue to put pressure on Roku’s TVs and player sales.

This week, the United States reported its second consecutive quarter of negative growth – this being a signal that the country has entered a recessionary cycle despite some government officials and economists arguing otherwise.

Roku Withdraws Full-Year Revenue Forecast Amid a Challenging Macro Backdrop

roku q3 2022 revenue and earnings forecast

For the third quarter of 2022, Roku expects to see its total revenues rise by just 3% on a year-on-year basis to $700 million. In addition, gross profits are expected to land at $325 million resulting in a gross margin of 46.4% – quite similar to this period’s percentage but significantly lower than the 53.5% the firm reported in Q3 2021.

Moreover, Roku expects to lose $190 million or $79.5 million more than what it lost this quarter while also swinging to losses compared to the same period a year ago.

The combination of a disappointing quarter, downbeat comments from the management team in regards to the macro backdrop, and a bleak outlook for the upcoming quarter explain why Roku shares are melting down today.

In addition, the management decided to withdraw its revenue forecasts for the entire 2022 fiscal year amid “uncertainties and volatility in the macro environment”.

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