Roku's big strategy change paid off

Roku stocks are soaring after the company nailed its first earnings report since going public earlier this fall.

While the set-top box maker is not quite profitable, it managed to post a smaller loss ($7.9 million) than Wall Street had expected ($12.7 million) thanks to especially strong revenue growth in ads and licensing its software. The company’s overall revenue grew to $125 million from $89 million in the same quarter last year.

The successful quarter follows a smooth initial public offering in September in which the decade-old company bucked an otherwise dismal market for tech public offerings. It also proved itself to be holding its own against big-name competitors in the space like Apple TV, Google Chromecast, and Amazon's Fire TV.

While the numbers show Roku is on the right track, though, it still makes most of its money through hardware sales, and the company will have to continue to show that its other businesses can drive meaningful revenue as set-top boxes become less widespread.

Here’s what we learned from Roku’s first quarterly check-in:

Roku’s becoming more of an advertising company

Roku made a name for itself with set-top accessories that connected televisions to streaming services like Netflix, Hulu, and Amazon. But as more and more televisions come with that software built in, the company’s gadget revenue growth is slowing.

The good news is that the other parts of Roku’s business are shifting accordingly. It’s making more money than ever from licensing deals that install its software into Roku-branded TVs and other devices and advertising it shows its users.

These categories--collectively referred to as platform revenue--grew 137 percent since last year, while hardware sales only rose 4 percent. More than two-thirds of this platform revenue now comes from ads, the company said in its earnings call on Wednesday.

Despite the growth, the majority of Roku’s revenue still comes from its hardware, a reality the company will have to reckon with as third-party gadgetry is gradually phased out by smart televisions.

More of Roku’s new accounts now come from its TVs than other devices

This quarter marked the first period in which more people signed up for Roku through its licensed TVs than its own gadgets.

This is an important shift for the company as it seeks to stockpile valuable information on a growing contingent of cable cord-cutters to bolster its ads business.

Roku says it now boasts 16.7 million active accounts, a 48 percent increase from the same quarter last year.

Roku’s been driving down its hardware prices to grow its user base

In fact, Roku is so focused on account growth that it’s significantly lowering prices on its devices in hopes of locking in more users. The company said the average price of its hardware dropped 23 percent from last year as it boosted sales by 35 percent.

“We strategically pass along player cost savings to consumers by actively driving down prices to grow active accounts," the company said in a shareholder letter Wednesday.

By doing so, the company is essentially trading off some short-term gain for long-term stability. Hardware sales won’t necessarily last forever, but registering the rush of cord-cutters to its platform will allow it to sell advertising around them far down the line.

Roku isn’t going heavy on marketing

Despite having somewhat less brand cachet than its giant Silicon Valley rivals, Roku hasn’t significantly amped up its marketing expenses. Instead, it relies on prominent placements that its branded TVs afford it in electronics aisles and online listings as well as the recognition its accumulated from its years in the space.

Despite the low spend, the company claims its televisions now account for one fifth of those sold in the United States.