Roku's isn't just a hardware company anymore - CEO Anthony Wood explains why ads are its future

• Roku's first-quarter earnings report Tuesday highlighted a big shift in the company's business.
• It's now gaining more revenue from its platform business - which is primarily comprised of advertising sales - than from the digital media players that made it famous.
• In an interview with Business Insider, CEO Anthony Wood said investors should expect advertising to only get more important for the company.

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Roku made a name for itself with its low-cost, easy-to-use streaming video players, but its future, according to CEO Anthony Wood, is in advertising.

Investors got a sense of what that future could look like on Wednesday, when the company reported its first-quarter results. For the first quarter ever, the company gained more revenue from from its platform business - which primarily consists of ad sales, but also includes commissions the company gets on the sale of subscriptions and videos through its platform and fees from licensing its software - than from selling its video players.

Expect Roku's ad business to become only more important to the newly-public company in the future. Consumers are increasingly shifting their viewing habits away from broadcast, cable, and satellite TV toward streaming video, Wood said. As they do, advertisers will follow.

"It's a big market," he said.

The shift to advertising isn't a new one, Wood noted. The company's actually been working on it for five years. The fruits of that effort just became more obvious in its most recent period, when its platform sales accounted for 55% of Roku's overall revenue. In the fourth quarter, the platform business brought in 45% of Roku's revenue, and in first quarter last year, it accounted for just 36%.

Roku places video ads in some of the ad-supported channels consumers can tune in through its digital players and through Roku-powered smart TVs. It also sells display ads that run on its home screen and branded buttons on its remote controls.

Already about 10% of Americans aged 18 to 34 can only be reached with TV ads via Roku's platform, because they only watch TV content via a Roku streaming player or a Roku-based smart TV, Wood said. What's more, Roku's data suggests ads placed in streaming video are more effective than the ads that are interspersed in traditional broadcast or cable TV, he said.

Together, those factors "are what's driving the shift" toward streaming video advertisements, Wood said.

Despite the company's success in the ad business and the fact that a growing portion of Roku customers are accessing its service via televisions and set-top boxes made by the company's partners rather than by Roku, the company plans to stay in the hardware business, he said. The company has an interest in continuing to build out its customer base. And because Roku designed its software to work on relatively inexpensive and underpowered devices, it can offer its player at low prices and still make money on them, Wood said.

"We're going to be selling hardware for a long time," he said.

Roku's first-quarter results topped expectations and the company offered a better-than-expected forecast for its rest-of-the-year results. In after-hours trading following its report, Roku's shares were up $1.12, or 3%, to $37.20.

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