All posts by manageBattleRoad

Battle Road IPO Review, independent internet stock research, Independent Stock Research, internet advertising, internet stock research, Internet Stocks, IPO Research, recent IPO research, Recent technology IPOs, Roku Research

Roku

Taking a Switzerland-style Approach to Internet Television

RokuRoku (NASDAQ: ROKU), a provider of television streaming devices, and advertising services, becomes the most recent addition to our Battle Road IPO Review Hardware coverage. Founded in 2002, and based in Los Gatos California, the company is best known for its Roku family of internet streaming devices, having been a pioneer in the field. The company is led by founder and CEO Anthony Wood. Steve Louden, CFO, joined Roku in June of 2015, after having held various finance roles at Expedia, between 2009 and 2015, including VP of corporate finance, and treasurer. Consensus estimates call for revenue of $485 million and a Loss Per Share of $0.64 in the current year, while next year, the company is expected to reach $625 million in revenue, and record a loss of $0.50.

Roku made its debut on the NASDAQ on September 28, in a 15.7 million Class A share IPO, priced at $14 per share. The IPO closed on October 1st, with the underwriters having exercised the option to purchase an additional 2.4 million shares. In all, the company sold 10.4 million shares, while selling shareholders sold 7.7 million shares. Importantly, the company’s Class B shares contain 10x the voting power of the Class B shares sold to the public, and Class B shareholders retain 98 percent of the voting rights post offering. Combined, there are now roughly 97 million shares outstanding. At a recent price of $38, Roku has a market cap of roughly $3.8 billion. The IPO was led by Morgan Stanley, Citigroup Capital Markets, Allen & Company, RBC Capital Markets, Needham & Company, Oppenheimer, and William Blair. Roku has a 180 day lock-up period that expires on March 27, 2018.

Best known for its family of internet streaming devices, Roku, in its current incarnation, was essentially a spin-out from Netflix (NASDAQ: NFLX), which had conducted work to develop and manufacture its own television streaming device about a decade ago. Upon further reflection, however, Netflix concluded that selling its own streaming device would undercut its efforts to persuade other manufacturers of such devices to support Netflix’s television and movie streaming content. A new company was created, under the name Roku, and each party was free to pursue its rivals to support its devices and content separately.

With Anthony Wood at the helm, therefore, grew up alongside Netflix, as one of the first commercially successful streaming device manufacturers in the early days of internet TV. Though Roku continues to garner the largest installed base of internet streaming devices, its success has since drawn numerous competitors into the market, including Apple, Amazon.com, and Google, all of which offer internet television streaming devices.

Today, Roku offers five different devices, priced between $29.99 and $99.99 at retail. For all of 2016, the company’s devices accounted for roughly 74 percent of revenue, with advertising and subscription revenue sharing accounting for the remainder. In 2016, device revenue grew by nine percent over the prior year. Gross margin from devices was roughly 15 percent, attesting to the price competitiveness of the category. In the first half of 2017, device revenue contracted by two percent versus the prior year, while gross margin fell from 17 percent to just 12 percent.

The more exciting part of Roku’s business is what it refers to as “platform,” which includes advertising and subscription revenue sharing. Using its position as a Switzerland-style provider of streaming services, unencumbered by ties to any of the cable network or internet streaming service providers, Roku has developed relationships with advertisers that are eager to take part in the trend toward internet television, and provide ads to internet television watchers. Through its opt in system, Roku is able to record the preferences of viewers, presumably capturing important demographic data that enables advertisers to reach their intended audience more efficiently. Roku claims 15 million such subscribers from among the total number of devices sold.

Today, advertising accounts for 67 percent of the company’s platform revenue, which totaled $82 million in the first half of 2017, up 91 percent from the prior year. Platform revenue grew from 27 percent of sales in the first half of 2016 to 41 percent in the first half of 2017. Platform gross margin was 76 percent in the first half of 2017, up from 71 percent in the first half of 2016. As a result of the shift in revenue mix, the company was able to achieve 23 percent revenue growth in the first half of 2017, along with a gross margin of 38 percent, considerably higher than the 31 percent achieved in the prior year.

While the above-mentioned trends narrowed the company’s operating losses, Roku still has much work ahead if it intends to run a profitable business. The company’s operating loss was $43 million in 2016. Its operating loss was $21 million in the first half of 2017, an improvement over the $32 million operating loss of 1H 2016. Despite the favorable trends in revenue and gross margin, Roku ramped up its R&D spending by 25 percent, reaching $48 million in the first half of the year, or 24 percent of total revenue, an exorbitant sum, which calls into question its desire or plan to improve profitability.

Over the last few years, the competitive landscape has intensified, with Apple, Amazon.com, and Google having introduced a variety of new devices into the market, as the battle for the living room spawned by the rise of internet television viewing continues. Overall, we are intrigued by Roku’s approach, which provides benefits for viewers, advertisers, and content creators. Nevertheless, we would prefer to see solid evidence of reaching and sustaining profitability, particularly given its current valuation, which has rallied dramatically in the last week, after reporting results for its first quarter as a public company.

Post IPO, Roku has a very good balance sheet with an estimated net cash position of $245 million post-offering, inclusive of $23 million in long term debt. Nonetheless, given the expectation for continued losses this year and next, the stock ranks near the very bottom of our Hardware sector coverage.

Battle Road IPO Review, independent internet stock research, independent research on IPOs, Independent Stock Research, IPO Research, recent IPO research, Redfin research

Redfin: Democratizing the Real Estate Business

Redfin (NASDAQ: RDFN), an online residential real estate company, is a recent addition to our Battle Road IPO Review Internet sector coverage. Founded in 2004 in Seattle, Washington, and led by CEO Glenn Kelman, Redfin began actively serving customers in 2006. Consensus estimates call for revenue of $364 million in 2017, followed by revenue of $480 million in 2018. With regard to earnings, the Consensus foresees a loss of $0.17 in 2017, followed by a loss of $0.04 in 2018.

Redfin debuted on the NASDAQ on July 28th, 2017 at an opening price of $15 per share. The offering featured 9.22 million shares of Class A common stock, all of which came from the company. Following the transaction, there are roughly 98 million shares of Redfin outstanding. Redfin has a 180 day lock-up period that expires on January 24th, 2018. Goldman Sachs and Allen & Company were the lead book-running managers for the offering, with BofA Merrill Lynch and RBC Capital acting as book-running managers, and Oppenheimer & Co. and Stifel as co-managers. At a recent share price of $25, Redfin carries a market cap of roughly $2.5 billion.

Redfin’s mission is to evolve the online real estate business to benefit consumers. To do this, the company has formed an online platform through which customers can buy and sell houses and schedule house tours with the push of a button. Redfin creates a thorough and expansive profile for every property on its platform. Once profiles are constructed, the company promote them to a wide set of prospective buyers on its website. The site is built with proprietary software, which the company believes constitutes a competitive advantage. Redfin’s real estate agents draw upon the company’s technology to form an affordable, quick, and quality service for customers.

With commissions that normally range between 1 and 1.5 percent, Redfin is more affordable than the standard rate of 2.5 to 3 percent commonly charged by other real estate agencies. Redfin’s customers consistently gain value on their purchases, saving an average of $3,500 per transaction in 2016.

With a 44 percent increase in monthly visitors on its website from Q1 2016 to Q1 2017, Redfin is the fastest growing top ten real estate site. The company boasted more than 20 million visitors to its website this past quarter. The real estate agents employed by Redfin are not only compensated by sales commission, but also customer satisfaction. Statistics illustrate the success of this sales strategy, as Redfin claims that its customer satisfaction rate is 32 percent higher than its average competitor, and the company’s customer retention rate exceeds that of its rivals by 37 percent. In 2016 alone, Redfin facilitated the transaction of over 75,000 properties worth more than $40 billion. Along with this, the company gained market share in 81 of its 84 markets in 2016. These 84 markets are all in the United States and span 43 states and nearly every major city in the nation.

While Redfin’s revenue is steadily growing, the company is not yet profitable. In 2014, Redfin generated $125 million in revenue, followed by $187 million in 2015, and $267 million in 2016. This is a 49 percent increase from 2014 to 2015, and a 43 percent rise from 2015 to 2016. Despite rising revenue, the company still operates at a loss. Redfin posted an operating deficit of $25 million in 2014, $30 million in 2015, and $23 million in 2016. The company’s losses rose 22 percent from 2014 to 2015, but took a step in the right direction the next year, with losses narrowing by 23 percent between 2015 and 2016.

To learn more about Refin’s Post-IPO financial position, and valuation relative to its Internet peers, please contact Battle Road Research at info@battleroad.com.