How Roku plans to keep growing its advertising revenue

The Roku Channel factors heavily into Roku's future ad revenue growth. (Roku)

Roku’s shift in focus from its device business to its platform is paying dividends in higher advertising revenue, but the company still has lots of room to keep growing.

During the third quarter, Roku’s platform revenues broke $100 million for the first time and rose 74% year over year. Coupled with device revenue, the company pulled in $173 million overall, up 39% year over year. But the big boost to platform earnings, driven by advertising growth, still wasn’t in line with what investors expected.

Roku’s stock fell 16% in early market trading today after platform revenue came up about $3 million shy of forecasts. But Roku CEO Anthony Wood said there’s still a lot of runway for ad growth in the platform business.

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“It's well positioned and we're executing well. If you just think about it big picture, there is $70 billion a year spent on TV advertising. Our platform business in the quarter was $100 million,” said Wood. “We're very proud of that but there's a lot of room to grow there.”

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Content distribution and licensing are also pieces of the pie for Roku’s platform business, but advertising represents a big chunk of that business. In turn, the ad-supported Roku Channel is an integral part of the ad revenue growth strategy. Roku has recently added more content to the Roku Channel, and Scott Rosenberg, general manager of Roku’s platform business, said the channel continues to be a “fertile area of investment.”

As Roku works on adding content and increasing engagement, it's also focusing on making ads more effective. Rosenberg said Roku has made inroads with many of the top brands in big ad categories such as automotive and wireless by presenting research on the benefits of over-the-top advertising.

“In the last quarter, almost half of every ad impression that ran on our platform was associated with some sort of research study in which we were showing back to the brand the ROI of their investment with Roku,” Rosenberg said, according to a Seeking Alpha transcript.

Wood said 10% of viewers age 18 to 34 watch television on Roku but noted 10% of TV ad budgets for reaching that demographic have yet to move to the Roku platform.

"The biggest obstacle there is just the way the advertiser is used to buying ads, just their traditional spending pattern and so by using measurement and ROI analysis, we can help move that along by showing advertisers that this new way of advertising really, really works," Wood said.

In terms of short-term future growth, Roku raised its full-year advertising growth estimates to 42%. In the longer term, the company didn’t put limits on advertising growth but said it will have to overcome traditional spending patterns of advertisers by “constantly coaching” clients to move their spending to Roku.