$Roku Inc(ROKU)$ It has come to my attention now that there are so many Roku bears lately, trashing this company for no particular reason or no claim to back them up. I think by sharing what my friend had done through an interview with Roku cfo will shut them up once and for all.

Enjoy. Ps: it will be a 2-part post since tiger only allow 10000 words.

The Street was a bit unnerved when Roku reported third-quarter revenue on November 3rd below expectations, in large part a result of the fact that TV sales have been held back by the global component shortage, and supply chain delays that are roiling the entire hardware industry.

But perhaps more germane to long-term Roku investors is that the company’s CFO, Steve Louden, argued forcefully that Roku’s position in television distribution is as strong as ever. My friend interviewed with Louden shortly after the report and pressed him on all the competitive threats from Google, Apple, Amazon, and Vizio.

Louden didn’t bat an eye.

“We've gone from no market share to we're number one in North America in terms of our market share, at roughly a third of TV's sold,” noted Louden. “We feel pretty good about how we’ve been competing, and will continue to compete well with all of those sorts.”

The competition on TV sets “has always been fierce,” Louden told my friend. Nevertheless, those vendors make the mistake of trying to shoehorn their phone and tablet software into a TV, he pointed out.

“They all are optimizing their mobile ecosystem, not the TV ecosystem,” said Louden. “And as a result, it's still cheaper to build a Roku TV” because “we have the only purpose-built operating system for TV.”

“It's a better mouse trap.”

In addition to discussing the competitive landscape, Louden volunteered that he’s “pretty excited” about how the addressable market is expanding. Up until recently, Roku had mostly been disrupting linear TV ad spend with over-the-top. Now, says Louden, a new kind of spending is showing up increasingly on Roku, which is of the interactive, “digital first” kind, things such as cost per click rather than the traditional “run of show” or impression-based ads.

“Digital-first advertisers that have been focused on performance-oriented marketing, as well as social media spend, et cetera, including small/medium sized businesses, are moving over to Roku,” said Louden.

My friend: What things do you think are most important for investors to take away from the results of the output?

Steve: Yeah, I think there's three things to be highlighted for Q3, and looking into the future. First was, in the quarter, with the continued strengthening of the platform monetization side.

We hit a great milestone with our ARPU, or, Average Revenue Per User, going over $40 on a trailing 12 months basis for the first time. And that's up nearly 50%, year over year. That's driven by continued strength in things like the advertising business, the media and entertainment spending of the content publishers on the platform, and then content distribution value as well. That, first and foremost, that engine, is really working rather well.

The other thing that's pretty exciting that we talked about is not only are we seeing continued evidence of the traditional TV advertising dollars moving over to streaming and to Roku, but we're seeing increasing evidence that digital-first advertisers that have been focused on performance-oriented marketing as well as social media spend, et cetera, including small/medium sized businesses, are moving over to Roku and they're leveraging our One View platform.

That's really exciting because it speaks to even the small price of that digital-first advertising buy as a material increase in the TAM that we have on the monetization side.

That's very cool to see that not only are we making good progress with traditional TAM, but we can focus on the TV ecosystem that the digital first advertiser is moving over very fast. And for example, that type of performance-oriented spend on the One View platform nearly tripled.

Platform monetization overall is growing very fast, so that's growing even faster. That's very cool. And, then, certainly, there's a lot that we’re seeing out there around the supply chain disruption. And so the thing we talked a lot about on the call was the fact that the secular trends that really underpin Roku's position, and the opportunity, that shift to streaming, really continues.

We’re seeing more advertising dollars coming over to Roku from traditional TV. We're see more viewers cut the cord and move over that way. Those secular opportunities remain intact.

And we feel like we're doing pretty well despite these macro industry headwinds, you know, all these component-cost increases, inventory builds, availability issues, shipping cost increases, shipping delays. We've been navigating that relatively well, but that's certainly a short-term headwind, but we believe it's temporary in the long-term, and opportunities remain intact.

My friend: Let me make sure that I heard you correctly: with the term was One View, is that the term you used for the ad platform?

Steve: One View, yeah, that's our ad platform. It's basically the re-branded core of the DataXu product [acquired by Roku in 2019]. And so we've revamped that, we've integrated it into the overall ad ecosystem to leverage our first party data in our ad stack.

My friend: How do you know when you see those incremental digital spend? You mentioned you tripled. Is there something that tells you that typically this is stuff that it comes from, it's incremental TAM that it's from, it's performance-oriented demand that you're referring to?

Steve: Yeah, well, for example on that, we know whether a company's buying on an impression basis, you know, CPM, cost per impressions, versus a performance-oriented structure like a cost per acquisition or a cost per click-through. Yeah, we can differentiate the type of targeting that's going on, and the type of the structure of the advertising campaign.

My friend: In other words, is something that's cost per click, let's say, is that synonymous with non-traditional advertising, not TV shifting over, but this new interactive advertising in incremental TAM? Is that unique?

Steve: It's not that unique. That's an example of a performance-oriented structure. Certainly most, if you think about how traditional TV has been bought, it's been bought on a run of network, un-targeted basis, 15- and 30-second TV spot, or lightly targeted, which would be things like Nielson demographics.

That's how traditional TV advertisers are used to buying. And so that's what many of them, especially when they first move over to the Roku platform, they continue buying the structure. Some of the more advanced advertisers, those are also TV advertisers, have moved some of their budgets over to these performance structures. But for the most part, traditional TV buyers are still buying some form of 15- to 30-second spot.

My friend: Okay. Instead of buying the demo, buying the performance is what you're saying in general shows the shift that's happening to new incremental TAM?

Steve: Yeah, and there's a continuum, right? Within the traditional 15- to 30-seconds format, you could buy that on a more targeted basis. But you'd still be buying impressions versus some kind of outcome that you're targeting to, right?

My friend: That makes sense. I want to talk a little bit about competition in the platform space really for the hardware, just to get out in front of people. Not just strictly about NBC’s Peacock and competitive offerings for streaming.

But Google, Apple, Amazon, Vizio, all these competitors that want to get what you've got in terms of deals with partner manufacturers. It appears competition's fierce. Is there a general strategy that you guys are pursuing in that crowded market for getting software onto devices that are going to be bought at retail by consumers?

Steve: Just to clarify, I assume you're talking about the Roku TV product?

My friend: Right, correct. For example, we’ve heard that Google is paying partners to use Google TV, and they've raised the price they’re paying. There’s a report out there that said Google is raising their rates above what Roku will give the partners to try and get deals, to get placements.

There's more speculation, again, about potential, theoretical Apple TV, I mean, an actual metal and glass box. There's Amazon becoming its own TV OEM, it would appear, in various markets around the world. And we even hear about Vizio — apparently, Vizio's SmartCast platform grew users by 35% even though they’re pretty limited by the footprint on TV. These are all instances, I take it, to one degree or another, of getting software onto a television set.

Steve: Yeah, yeah, I think just a little bit of more context, because I think a lot of people haven't paid too much attention to that TV business, going back a number of years.

But first off, we've been competing — whether it's in TVs, whether it's in players, whether it's the platform — we've been competing with those big-name companies for a long, long time. And in different parts of the TV ecosystem, they've been competing and throwing quite a bit of money at that for years. I think competition's always been fierce. I think the best way that we stay ahead of the game is to continue to innovate.

And one of the big things that I would remind you, and I know you've personally heard this before based on our talks, is we have the only purpose-built operating system for TV. And that's really important, specifically in the TV space because that allows us to design to run on low-cost hardware from day one, versus whether it's Apple, there may be rumors they're getting into the licensed TV space — traditionally, they haven't licensed their operating system to anybody on the TV side.

They obviously build their own players, but their market share on the player side has dwindled significantly over time. They're at a very high price point there.

Continued to part 2.