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ROKU, Inc. (ROKU) IPO

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Cord cutters everywhere get ready ROKU is going public. The company filed and S-1 on September 1st. There is plenty of time before the proposed offering becomes effective. Best guess is sometime between Halloween and Thanksgiving. In the meantime, there will be lots of controversy over the company’s direction.

For those who aren’t ROKU devotees here are some fun facts. The company pioneered streaming to television. They are a major force with over 15 million active customers as of midyear 2017. Why are subscribers willing to pay as much as $50 for a hardware device in order to watch television programs via the Internet?

From the ROKU home screen, users can search, discover and access over 500,000 movies and TV episodes in the United States, as well as live sports, music, news and more. Clearly, this is the stuff that TV binging is made for.

There are two sides to ROKU’s business. The hardware side sells boxes that allow customers to stream things like Netflix and other popular services. ROKU hardware is easy to install and creates an Internet stream to televisions not already equipped. Until more recent times, that included over half the flat panel sets sold.

The other side licenses software and collects advertising revenue.

The mix of business is changing dramatically as software takes over. Last year, software accounted for about 25% of revenues while contributing 60% of gross profits. In the first half of this year software was 40% of revenues and an overwhelming 80% of gross profits.

A Strong Price Competitor In Hardware

ROKU hardware devices offer are low in cost compared with the standard cable box or others such as Apple TV. That appeals to customers tired of paying for cable services or simply don’t want to pony up $150 to Apple.

These days viewing habits are changing. TV audiences are becoming more fragmented and viewers insist on having greater control over viewing schedules.

The so-called trend of cable cutters is growing everyday. For example ROKU users streamed more than 6.7 billion hours in the six months ended June 30, 2017, 62% growth from the six months ended June 30, 2016.

The ROKU Advantage Thus Far

The market for streaming media is also rapidly evolving. There is growing competition from Amazon, Apple, Google and others. The principal means of competition so far has been ROKU’s easy to install hardware that enables televisions without pre installed “Smart TV” capabilities to receive streaming broadcasts. The variety of devices and their selling prices is another factor. Moreover, ROKU can offer streaming services from Amazon and Google.

As more televisions are coming with Internet features preinstalled, ROKU’s hardware advantages are being challenged. So ROKU is moving from this low margin business to software and already is connected to Hisense and Sharp.

But how well the company stands out in an already crowded market is another question. Some on Wall Street applaud the move, many believe the move will only commoditize the company: so stay tuned.

Latest Financials

Like many technology companies, ROKU is strong on revenues and short on the bottom line. For the latest year, revenues totaled a healthy $200 million while losses added to some $24 million.

Follow The Money

ROKU has no obvious need for public equity capital. True the balance sheet is running a equity deficit of roundly $215 million so $100 million in fresh capital would make a major step contributing to long term solvency. But beyond this, the company’s plans are not sharply focused. Consider their very own description.

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock.

The current intend to use the net proceeds from the offering primarily for general corporate purposes, including working capital, research and development, sales and marketing activities and capital expenditures. They may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, technologies or businesses that complement existing business. Translation: management will have broad discretion over the uses of the net proceeds.