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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-26 · 197 added, 250 removed, 174 unchanged (72% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Report.

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report on Form 10-K, particularly in the section titled Item 1A.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the section titled Item 1A.

Risk Factors and the Note Regarding Forward-Looking Statements.

This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company's Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 2, 2020.

We operate in two revenue segments:

This section of this Annual Report generally discusses fiscal years 2021 and 2020 and year-to-year comparisons between those years.

Discussions of fiscal year 2019 and year-to-year comparisons between fiscal years 2020 and 2019 that are not included in this Annual Report can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report for the fiscal year ended December 31, 2020 filed with the SEC on February 26, 2021.

We operate in two reportable segments:

the platform segment and the player segment.

Platform revenue is generated from the sale of digital advertising and related services, content distribution services, subscription and transaction revenue shares, Premium Subscriptions, billing services, sale of branded channel buttons on remote controls and licensing arrangements with service operators and TV brands.

Player revenue is generated primarily from the sale of streaming players.

Platform revenue is generated from the sale of digital advertising and related services including our OneView ad platform, content distribution services (such as subscription and transaction revenue shares, media and entertainment promotional spending, the sale of Premium Subscriptions, and the sale of branded channel buttons on remote controls), and licensing arrangements with service operators and TV brands.

Player revenue is generated primarily from the sale of streaming players and audio products.

We expect to continue to manage the average selling prices (“ASP”) of our streaming players to increase our active accounts.

As a result, player revenues may not increase as they have historically.

We expect that the tradeoff from player gross profit to grow active accounts will result in increased platform monetization and gross profit.

We expect that the trade off from player gross profit or loss to grow active accounts will result in increased platform revenue and platform gross profit.

COVID-19 Update

The widespread global impact from the outbreak and spread of the novel strain of coronavirus referred to as COVID-19, which was declared a pandemic by the World Health Organization in March 2020, continued through the end of 2020.

Precautionary measures to slow down the spread of the virus that were put in place by governmental authorities had eased in many locations but were re-instated in many geographies during the fourth quarter.

We continue to have the majority of our workforce work from home to protect the health and safety of our employees and travel has been severely curtailed.

The COVID-19 pandemic, and the resulting precautionary measures, have caused, and are expected to continue to cause, economic uncertainty both in the U.S.

and globally as well as significant volatility in, and disruption to, financial markets.

During the fourth quarter of 2020, the ongoing COVID-19 pandemic continued to accelerate the shift of TV viewing away from traditional pay TV to streaming TV resulting in a faster growth of our active accounts and an increase in streaming hours.

Although the growth in streaming hours per account moderated during the third quarter, streaming hours per account accelerated again during the fourth quarter to 17.0 billion hours.

Despite advertising slowdown during the second quarter that we experience as a result of the COVID-19 pandemic, during the fourth quarter we had strong platform revenue growth driven by advertising spend and the expansion of content distribution partnerships.

We believe advertising budgets will continue to shift from traditional linear TV to streaming TV and that we will benefit from this shift due to our advanced advertising capabilities.

Major content publishers continue to re-organize around streaming and as a result, our content distribution business has benefited as our rapid rate of active accounts growth was accompanied by strong consumer demand for ad-supported viewing, subscription services and premium movie rentals.

While we have experienced an increase in TV streaming during the COVID-19 pandemic and our business generally has generally, there can be no assurance that these patterns will continue into 2021.

Despite the adverse impact COVID-19 pandemic has had on global supply chains, we have largely been able to maintain inventory of our players, audio products and accessories in stock at retailers and online stores.

During the fourth quarter, player sales moderated due to the impact of ongoing COVID-19 pandemic restrictions and ongoing economic uncertainty on holiday sales and consumer demand.

While our player and Roku TV model sales have remained strong during the COVID-19 pandemic, there can be no assurance that these patterns will continue throughout the pandemic or beyond.

Although the COVID-19 pandemic’s impact on our future operations and financial performance remains uncertain, we are continuing to monitor our operating expenses and capital expenditures and are committed to investing in strategic areas to grow our business and extend our competitive advantages.

The widespread global impact from the COVID-19 pandemic continued through 2021.

Governmental authorities have put in place various precautionary measures and promoted vaccination programs to slow down the spread of the virus.

The impact of the pandemic continues to vary by geography as well as over time as different variants of the virus surface.

The majority of our workforce continues to work from home to protect the health and safety of our employees, and business travel continues to be curtailed.

We evaluate and refine our return to office strategy by geography as circumstances change.

We expect that most employees will adopt a hybrid work schedule (consisting of both in-person work and working from home) in 2022.

The COVID-19 pandemic, and the resulting precautionary measures, have caused, and are expected to continue to cause, economic uncertainty both in the United States and globally as well as significant volatility in, and disruption to, financial markets and supply chains.

Global supply chain disruptions have resulted in shipping delays, increased shipping costs, component shortages, and increases in component prices.

In addition, some of our TV brand partners have faced inventory challenges that have negatively impacted their unit sales.

The COVID-19 pandemic has accelerated the shift of TV viewing away from legacy TV to streaming TV.

During the year ended December 31, 2021, we continued to see an increase in the number of active accounts , but the growth rate was slower than in the prior year .

Active accounts increased to 60.1 million as of December 31, 2021, growing 17% year-over-year.

Streaming hours for the year ended December 31, 2021 increased to 73.2 billion, growing 25% year-over-year.

We have largely been able to maintain an inventory of our players, audio products, and accessories in stock at retailers and online stores throughout the COVID-19 pandemic.

However, like many companies, we have been negatively affected by the constraints in the global supply chain, which have resulted in shortages of certain components, increased component costs, shipping constraints, and increased shipping costs.

Player unit sales were down in the second half of 2021, year-over-year, due to the demand spike in the second half of 2020 because of the COVID-19 pandemic.

In 2021, we insulated our customers from the rising player-related costs and prioritized account acquisition growth, which strategically supports our Average Revenue per User (“ARPU”) growth.

The increasing component costs put additional constraints on our player gross margin resulting in a gross loss in the player segment for the year ended December 31, 2021.

Though we do not believe that the cost constraints and supply chain issues are permanent, they may continue to impact us in the near future, and we expect player gross margin to be negative until such conditions normalize.

Our platform segment continues to perform well, with platform revenue increasing to $2,284.9 million for the year ended December 31, 2021, reflecting year-over-year growth of 80%.

Our ARPU grew to $41.03, up 43% year-over-year.

Almost every major media company has reorganized around streaming and, as a result, our content distribution business has benefited as our active accounts growth was accompanied by continued consumer demand for both ad-supported and subscription services, and increased media and entertainment promotional spending by our content partners.

We believe advertising budgets will continue to shift from legacy TV to streaming TV and that we will benefit from this shift due to our advanced advertising capabilities.

During the fourth quarter of 2021, however, certain advertising verticals experienced supply chain disruptions that negatively impacted product availability and resulted in reduced advertising spend.

While we have experienced an increase in TV streaming during the COVID-19 pandemic and our business generally has benefited, there can be no assurance that these patterns will continue into 2022.

Key Performance Metrics

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We use gross profit as the primary metric to measure the performance of our business because we have two revenue segments that have different margin profiles, and we aim to maximize our higher margin platform revenue from our active accounts as they stream content on our platform.

The majority of our gross profit is generated from our platform segment.

Our gross profit was $808.2 million and $495.2 million for the years ended December 31, 2020 and 2019, respectively.

Substantially all of our gross profit is generated from our platform segment.

Our gross profit was $1,408.6 million and $808.2 million for the years ended December 31, 2021 and 2020, respectively, reflecting an increase of 74%.

Active Accounts

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For example, a single account may be used by more than one individual, such as a family, and one account may be used on multiple streaming devices.

We had 51.2 million and 36.9 million active accounts as of December 31, 2020 and 2019, respectively.

During 2020, the fastest growing source of new accounts was licensing arrangements with our Roku TV brand partners and other service operators, which collectively accounted for 62% of new accounts, up from 56% in 2019.

We had 60.1 million and 51.2 million active accounts as of December 31, 2021 and 2020, respectively reflecting an increase of 17%.

Hours Streamed

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We define streaming hours as the aggregate amount of time streaming devices stream content on our platform in a given period.

Hours streamed on non-Roku platforms are not included in this metric.

Hours streamed from The Roku Channel on non-Roku platforms are not included in this metric.

We report streaming hours on a calendar basis.

Additionally, we believe that over time, increasing user engagement on our streaming platform increases our platform monetization because we earn platform revenue from various forms of user engagement, including advertising, revenue shares from subscriptions and transactional video on-demand.

Additionally, we believe that over time, increasing user engagement on our streaming platform increases our platform monetization because we earn platform revenue from various forms of user engagement, including advertising, as well as revenue shares from subscriptions and transactional video on-demand.

However, our revenue from content publishers is not tied to the hours streamed on their streaming channels, and the number of streaming hours does not correlate to revenue earned from such content publishers or ARPU on a period-by-period basis.

Moreover, streaming hours on our platform are measured whenever a Roku player or a Roku TV is streaming content, whether a viewer is actively watching or not.

For example, if a Roku player is connected to a TV, and the viewer turns off the TV, steps away or falls asleep and does not stop or pause the player, then the particular streaming channel may auto-play subsequent content for a period of time determined by the streaming channel.

For example, if a Roku player is connected to a TV, and the viewer turns off the TV, steps away, or falls asleep and does not stop or pause the player, then the particular streaming channel may continue to play content for a period of time determined by the streaming channel.

We believe that this also occurs across a wide variety of non-Roku streaming devices and other set-top boxes.

During the first quarter of 2020, we completed the deployment across all of our devices of a new Roku OS feature that is designed to identify when content has been continuously streaming on a channel for an extended period of time without user interaction.

Since the first quarter of 2020, all of our devices include a Roku OS feature that is designed to identify when content has been continuously streaming on a channel for an extended period of time without user interaction.

This feature, which we refer to as “Are you still watching,” periodically prompts the user to confirm that they are still watching the selected channel and closes the channel if the user does not respond affirmatively.

We believe that the implementation of this feature across the Roku platform benefits us, our customers, channel partners, and advertisers.

Some of our leading channel partners, including Netflix, also have implemented similar features within

their channels.

Some of our leading channel

partners, including Netflix, also have implemented similar features within their channels.

This Roku OS feature supplements these channel features.

This feature has not had and is not expected to have a material impact on our future financial performance.

We streamed 58.7 billion and 37.8 billion hours during the years ended December 31, 2020 and 2019, respectively.

We streamed 73.2 billion and 58.7 billion h ours during the years ended December 31, 2021 and 2020, respectively reflecting an increase of 25%.

Note About Our Streaming Hours Adjustments

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Revised streaming hours for 2016 are not estimated and therefore revised 2017 YoY growth rates are not available.

Published SHs

Published YoY

Published SHs

Published YoY

Quarter Published SHs Revised SHs SHs % Delta Published YoY Revised YoY

2017 Q1 3.3B 3.2B (0.5)% 63.4% NA

2017 Q2 3.5B 3.5B (0.4)% 60.0% NA

2017 Q3 3.8B 3.8B (0.4)% 57.8% NA

2017 Q4 4.3B 4.3B (0.2)% 55.3% NA

2018 Q1 5.1B 5.1B (0.5)% 56.0% 56.1%

2018 Q2 5.5B 5.4B (0.5)% 57.2% 57.0%

2018 Q3 6.2B 6.1B (0.7)% 62.7% 62.1%

2018 Q4 7.3B 7.1B (2.2)% 68.6% 65.2%

2019 Q1 8.9B 8.4B (5.4)% 74.1% 65.5%

2019 Q2 9.4B 8.8B (6.0)% 72.1% 62.6%

2019 Q3 10.3B 9.6B (6.5)% 67.6% 57.9%

2019 Q4 11.7B 10.9B (6.3)% 60.2% 53.7%

2020 Q1 13.2B 12.3B (7.0)% 49.3% 46.8%

Year Published SHs Revised SHs SHs % Delta Published YoY Revised YoY

2017 14.8B 14.8B (0.4)% 58.8% NA

2018 24.0B 23.7B (1.1)% 61.7% 60.5%

2019 40.3B 37.8B (6.1)% 67.8% 59.3%

Average Revenue per User

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ARPU was $41.03 as of December 31, 2021 as compared to $28.76 as of December 31, 2020.

Factors Affecting Our Performance

Rate of TV streaming and advertising shift to OTT

Consumers have significantly shifted their TV viewing behavior, and we believe that someday all TV content will be streamed.

We also believe this presents a large market opportunity for digital advertising.

This shift in viewing behavior is a critical component of our business model because our platform revenue and player revenue, as well as our overall expense structure, is dependent on this shift.

In addition, the number of hours streamed on our platform is a critical element of our business because user engagement with our platform generates our advertising inventory and determines our advertising sell through.

User acquisition strategy

We acquire users through three primary ways:

our TV brand partners sell Roku TVs through our Roku TV licensing program, we sell streaming players, and we have licensing relationships with service operators.

We monetize our user base through platform revenue.

Player revenue and player gross profit have decreased, and may continue to decrease, over time as we strategically aim to acquire new users through the sale of lower priced streaming players.

Ability to monetize users and streaming hours

Our business model is to increase both active accounts and streaming hours while growing revenue and gross profit through the monetization of our streaming platform.

We believe we have a significant opportunity to grow platform revenue as we further monetize our users’ engagement.

Our platform makes it easy for content publishers to distribute and monetize their streaming content through three primary business models:

transaction video on demand (“TVOD”) that includes channels that offer a la carte movie purchases or rentals, subscription video on demand (“SVOD”) that includes subscriptions to individual video on demand channels and so-called virtual multichannel video programming distribution services, and advertising supported video on demand (“AVOD”) that includes channels that do not charge a subscription

fee to users.

We generate revenue from TVOD and SVOD channels from various forms of revenue sharing arrangements.

Our revenue sharing arrangements generally apply to new subscriptions for accounts that sign up for new services and to movie rentals or purchases for TVOD.

Through our platform we also are able to offer content partners with billing services which support in-channel purchases including movie purchases, rentals, and subscriptions.

Revenue from the distribution of AVOD channels is generated through the sale of advertising within the channel.

We are increasing the monetization of these streaming hours by expanding our advertising capabilities both on and off our platform.

We intend to continue to leverage our data and analytics to deliver relevant advertising and improve the ability of our advertisers to optimize their campaigns and measure their results.

We also plan to continue to expand our direct sales teams to increase the number of advertisers who use our services.

The Roku Channel offers free, ad-supported access for users to a selection of films, television series and other content.

The Roku Channel is a source of digital advertising inventory under our control and is another way that we connect content publishers with users.

The Roku Channel provides customers with free access to over 50,000 titles, including hit Hollywood movies, TV episodes, news channels and more and is rapidly becoming one of our leading sources of advertising inventory.

In January 2019, we launched Premium Subscriptions within The Roku Channel, through which we resell ad-free premium content subscription services from providers such as Showtime, Starz, and Epix.

Continued investment in growth

We believe that our future performance will depend on the success of the investments in our business that we have made, and will continue to make, to improve the value for users, content publishers and advertisers on our platform.

We must regularly update and enrich our platform to meet evolving consumer behavior and deliver a superior experience for our users, content publishers and advertisers.

Further, it is important that we remain a platform for content delivery and invest to provide content publishers with best-in-class publishing tools and actionable audience insights.

We must continue to innovate and invest in our advertising capabilities and technology so that we attract and encourage incremental advertising spend on our platform.

Accordingly, we plan to continue investing in our business to enhance our competitive differentiation and seed future growth.

In particular, these investments will include:

Research and Development initiatives to bring new features, technology, and content to our platform;

Sales and Marketing efforts to drive increased scale and engagement of our user base;

and building out our General and Administrative infrastructure to support a global scale business.

In the fourth quarter of each calendar year, we generally generate significantly higher levels of revenue and gross profit from platform segment revenue and significantly higher levels of player segment revenue.

For the years ended December 31, 2020 and 2019, fourth quarter revenue comprised 37% and 36% of our total net revenue, respectively, and fourth quarter gross profit comprised 38% and 33% of our total gross profit, respectively.

Components of Results of Operations

Platform Revenue

We generate platform revenue from advertising sales and related services, subscription and transaction revenue sharing arrangements with partners, the sale of Premium Subscription services, sales of branded channel buttons on remote controls and licensing arrangements with service operators.

Our first-party video ad inventory includes The Roku Channel, native display ads on our home screen and screen saver as well as ad inventory we obtain through our content distribution agreements with publishers.

We generate platform revenue from digital advertising sales and related services including our OneView ad platform, content distribution services (such as subscription and transaction revenue sharing arrangements, media and entertainment promotional spending, the sale of Premium Subscriptions, and the sale of branded channel buttons on remote controls), and licensing arrangements with service operators and TV brands.

Our ad inventory includes video ad inventory from AVOD content in The Roku Channel, native display ads on our home screen and screen saver, as well as ad inventory we obtain through our content distribution agreements with publishers.

To supplement supply, we re-sell video inventory that we purchase from content publishers and, to a lesser extent, directly sell third-party inventory on a revenue share basis.

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We generate most of our player revenue in the United States.

In our international markets, we primarily sell our

players through wholesale distributors which, in turn, re-sell to retailers.

We currently distribute our players in Canada, the United Kingdom, France, the Republic of Ireland, Mexico, Brazil and several other Latin American countries.

In our international markets, we primarily sell our players through wholesale distributors which, in turn, re-sell to retailers.

We currently distribute our players in various countries in North America, South America, and Europe.

Player revenue also includes the sale of our audio products, including wireless speakers, smart soundbars and wireless subwoofers.

Cost of Revenue

Cost of Platform Revenue

Cost of platform revenue consists of costs associated with arrangements with content partners and publishers including advertising inventory and content or programming licensing fees.

Cost of platform revenue also includes payment processing fees, allocated expenses associated with the delivery of our services including salaries, benefits and stock-based compensation for our operations and support teams, third-party cloud services and amortization of acquired technology.

Cost of platform revenue primarily consists of costs associated with acquiring advertising inventory and amortization costs of content, both licensed and produced.

Cost of platform revenue also includes other costs such as payment processing fees, allocated expenses associated with the delivery of our services that primarily include costs of third-party cloud services and salaries, benefits, and stock-based compensation for our platform operations personnel, and amortization of acquired developed technology.

Cost of Player Revenue

Cost of player revenue is comprised mostly of player manufacturing costs payable to our third-party contract manufacturer and technology licenses or royalty fees.

Cost of player revenue also includes inbound and outbound freight, duty and logistics costs, third-party packaging and allocated overhead costs related to facilities and customer support, and salaries, benefits and stock-based compensation for operations personnel.

Cost of player revenue is comprised mostly of manufacturing costs for streaming players and audio products payable to our third-party contract manufacturers and technology licenses or royalty fees.

Cost of player revenue also includes inbound and outbound freight, duty and logistics costs, third-party packaging, inventory reserves, and allocated overhead costs related to facilities and customer support, and salaries, benefits, and stock-based compensation for operations personnel.

Operating and Other Expenses

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In addition, research and development expenses include allocated facilities and overhead costs.

We expect research and development expenses to increase in absolute dollars as we continue to invest in the development of our platform, player and TV products, advertising products and other platform services.

We expect research and development expenses to increase in absolute dollars as we continue to invest in the development of our platform and player products and services.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions and stock-based compensation expense for our employees engaged in sales and sales support, marketing, communications, data science and analytics, business development, product management and partner and customer support functions.

Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions, and stock-based compensation for our employees engaged in sales and sales support, marketing, communications, data science and analytics, business development, product management, and partner and customer support functions.

Sales and marketing expenses also include marketing, retail and merchandising costs, and allocated facilities and overhead expenses.

We expect sales and marketing expenses to increase in absolute dollars in future periods as we focus on growing active accounts, platform and player revenues, and expanding our business internationally .

We expect sales and marketing expenses to increase in absolute dollars in future periods as we focus on growing active accounts, platform and player revenue, and expanding our business internationally.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative personnel.

General and administrative expenses consist primarily of salaries, benefits, and stock-based compensation for our finance, legal, information technology, human resources, and other administrative personnel.

General and administrative expenses also include outside legal, accounting, and other professional service fees as well as allocated facility expenses.

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Other Income (Expense), Net

For the year ended December 31, 2020, other income (expense), net consists of interest income on cash and cash equivalents, interest expense that primarily includes interest on our Credit Facility (as defined in ‘Liquidity and Capital Resources’ below) and amortization of deferred debt costs, foreign currency re-measurement and transaction gains and losses.

For the years ended December 31, 2019 and 2018, other income (expense), net consists of interest income on short-term investments and cash balances, interest expense that primarily includes amortization of deferred debt costs, foreign currency re-measurement and transaction gains and losses.

For the years ended December 31, 2021 and 2020, other income (expense), net consists of interest income on cash and cash equivalents, income recognized related to non-cash consideration associated with the delivery of services as part of a strategic commercial arrangement, i nter est expense that includes interest on our debt and amortization of deferred debt costs, foreign currency re-measurement, and transaction gains and losses.

Income Tax (Benefit) Expense

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We have a valuation allowance for U.S.

deferred tax assets, including net operating loss carryforwards and tax credits related primarily to research and development.

and Netherlands deferred tax assets, including net operating loss carryforwards.

deferred tax assets include tax credits related primarily to research and development.

We expect to maintain this valuation allowance for the foreseeable future.

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Years Ended December 31,

2021 2020 2019

Platform 83 % 71 % 66 %

Player 17 % 29 % 34 %

Total net revenue 100 % 100 % 100 %

Cost of Revenue:

Platform 30 % 28 % 23 %

Player 19 % 27 % 33 %

Total cost of revenue 49 % 55 % 56 %

Gross Profit:

Gross Profit (Loss):

Platform 53 % 43 % 43 %

Player (2) % 2 % 1 %

Total gross profit 51 % 45 % 44 %

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Total operating expenses 42 % 47 % 50 %

Loss from Operations

Other Income, Net:

Other income, net

Total other income, net

Loss before income taxes

Income tax (benefit) expense

Net loss attributable to common stockholders

Income (Loss) from Operations 9 % (2) % (6) %

Other Income (Expense), Net:

Interest expense — % — % — %

Other income (expense), net — % — % 1 %

Total other income (expense), net — % — % 1 %

Income (Loss) Before Income Taxes 9 % (2) % (5) %

Income tax benefit — % — % — %

Net Income (Loss) 9 % (2) % (5) %

Comparison of Years Ended December 31, 2021 and 2020

Years Ended December 31,

2021 2020 Change $ Change %

(in thousands, except percentages)

Platform $ 2,284,925 $ 1,267,744 $ 1,017,181 80 %

Player 479,659 510,644 (30,985) (6) %

Total net revenue $ 2,764,584 $ 1,778,388 $ 986,196 55 %

Platform revenue increased by $527.0 million, or 71%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase is mostly attributable to higher advertising revenues, including revenue from

our demand - side platform, which we acquired from dataxu in November 2019 .

In 2020, we re-branded our demand - side platform as the OneView Ad Platform and integrated it with Roku-native identity, data and attribution tools.

Platform revenues also increased due to higher content distribution and related transactional revenues, including from Premium Subscriptions.

Player revenue increased by $122.5 million, or 32%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in the volume of streaming players sold in addition to increased revenues from the sale of audio products and accessories.

During the year ended December 31, 2020, the volume of streaming players sold increased 28% as compared to the year ended December 31, 2019 offset by a 3% decrease in the average selling price of players.

The increase in the volume of players sold was due to an increase in demand for lower priced models, namely the Roku Express player and the Roku Premiere player, and in part to consumers spending more time at home due to the COVID-19 pandemic.

Platform revenue increased by $1,017.2 million, or 80%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily attributable to higher content distribution services, including higher revenue from media and entertainment promotional spending and Premium Subscriptions, we well as higher advertising revenue which includes revenue from our OneView ad platform.

Player revenue decreased by $31.0 million, or 6%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to a decrease in both the volume of streaming players sold and average selling prices, offset by a slight increase in revenue from the sale of audio products and accessories.

During the year ended December 31, 2021, the volume of streaming players sold decreased by 4% and the average selling price of players decreased by 7% as compared to the year ended December 31, 2020.

The decrease in the volume of players sold is due to the slowdown in growth in the year ended December 31, 2021 as compared to the year ended December 31, 2020 when the growth was aided by the COVID-19 pandemic.

The decrease in the average selling price is due to higher promotions during the year ended December 31, 2021 as compared to the year ended December 31, 2020 where the volume was aided by the COVID-19 pandemic and required fewer promotions.

Cost of Revenue

Years Ended December 31,

2021 2020 Change $ Change %

(in thousands, except percentages)

Cost of Revenue:

Platform $ 823,924 $ 503,177 $ 320,747 64 %

Player 532,060 466,992 65,068 14 %

Total cost of revenue $ 1,355,984 $ 970,169 $ 385,815 40 %

Gross profit:

Gross Profit (Loss):

Platform $ 1,461,001 $ 764,567 $ 696,434 91 %

Player (52,401) 43,652 (96,053) (220) %

Total gross profit $ 1,408,600 $ 808,219 $ 600,381 74 %

The cost of platform revenue increased by $240.5 million, or 92%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

This increase is a result of higher advertising related costs including inventory acquisition costs, in addition to higher content licensing fees, programming fees and credit card processing fees totaling $215.3 million.

Platform costs increased an additional $25.3 million due to increases in allocated personnel and operational overhead costs and amortization of acquired intangibles.

Gross profit for platform revenue increased by $286.4 million, or 60%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily driven by the overall growth in our platform revenues.

The cost of player revenue increased by $96.0 million, or 26%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The cost of player revenue increased approximately $73.1 million due to an increase in the volume of players sold.

Freight expenses increased by $14.2 million as a result of an increase in the volume of units sold as well as an increase in the overall cost of transportation.

Packaging and other overhead costs increased by $8.7 million.

Gross profit for player revenue increased by $26.5 million, or 155%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, driven by higher sales volumes of player products and accessories and lower direct manufacturing costs.

The cost of platform revenue increased by $320.7 million, or 64%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

This increase is primarily driven by higher advertising inventory costs, higher content amortization costs, Premium Subscription costs, and credit card processing fees totaling $303.1 million.

Platform costs increased an additional $15.3 million due to increases in cloud services costs for supporting the platform and higher personnel costs.

Gross profit for platform revenue increased by $696.4 million, or 91%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily driven by the overall growth in our platform revenue.

The cost of player revenue increased by $65.1 million, or 14%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The increase is primarily due to higher product costs of $35.6 million, an increase in freight costs of $15.0 million, an increase in overhead costs such as cloud services, outsourced consulting services, and personnel costs totaling to $9.4 million, higher royalty expenses of $5.7 million, and an increase in inventory reserves of $2.8 million offset by a reduction in other manufacturing related costs of $3.3 million.

Gross profit for player revenue decreased by $96.1 million, or 220%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, resulting in a gross loss for fiscal year 2021.

The increase in costs was driven primarily by higher direct manufacturing costs for player products and accessories as a result of disruptions in the global supply chain driving component prices higher, combined with reduced player revenue in 2021 as compared to 2020.

We believe that the cost increases and supply chain issues will continue in the near future, and we expect to incur negative gross margin in the player segment until such conditions normalize.

Operating Expenses

Years Ended December 31,

2021 2020 Change $ Change %

(in thousands, except percentages)

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Research and development

Research and development expenses increased by $90.8 million, or 34%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase was primarily due to increases in personnel-related costs of $65.5 million as a result of increased engineering headcount of 14% and related stock-based compensation, higher professional service and consulting fees of $27.8 million, and higher allocated facilities costs of $11.7 million offset by allocations of overheads to cost of platform and player revenue of $14.2 million.

Research and development expenses increased by $105.8 million, or 30%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The increase is primarily due to increases in personnel-related costs of $84.3 million, as a result of increased engineering headcount and related stock-based compensation, and higher consulting, professional services, and cloud services costs of $17.4 million.

Sales and marketing

Sales and marketing expenses increased by $120.6 million, or 67%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase was primarily due to increases in personnel-related costs of $61.9 million related to increased headcount of 15% and related stock-based compensation in sales and sales support, product management, marketing and business analytics to support efforts to grow our business.

Other sales and marketing expenses include an increase of $42.2 million mainly due to increase in marketing, retail and merchandising costs, an increase of $10.6 million in higher facilities costs, an increase of $5.6 million in outside consulting expenses, and an increase of $3.7 million in other expenses primarily related to higher amortization of acquired intangible assets offset by a decrease of $3.4 million in travel expenses due to the COVID-19 pandemic.

Sales and marketing expenses increased by $156.1 million, or 52%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The increase is primarily due to increases in personnel-related costs of $91.4 million related to increased headcount and related stock-based compensation in sales and sales support, product management, marketing, and business analytics to support efforts to grow our business.

Sales and marketing expenses also include an increase of $44.7 million mainly due to increases in advertising expenses to promote the Roku brand, marketing, retail and merchandising costs, and general sales promotions, an increase of $9.5 million in professional services and consulting fees, and an increase in facilities costs of $8.3 million due to expansion of office spaces.

General and administrative

General and administrative expenses increased by $56.8 million, or 49%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase was primarily due to increases in personnel-related costs of $29.2 million related to increased headcount of 27% and related stock-based compensation , an increase of $16.1 million related to higher legal, consulting and professional service fees, an increase of $5.1 million related to higher facilities costs, an increase of $3.1 million in allowance for doubtful accounts primarily from adoption of accounting standard for credit losses, and a net increase of $3.3 million that includes various corporate expenses and overheads partly offset by a decrease in travel expenses due to the COVID-19 pandemic.

Other Income (Expenses), Net

General and administrative expenses increased by $83.1 million, or 48%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The increase is primarily due to increases in personnel-related costs of $50.0 million related to increased headcount and related stock-based compensation, an increase of $28.3 million related to higher legal expenses, consulting, and professional services fees, and a net increase of $4.8 million related to higher general overhead, business taxes, and similar costs offset by recoveries of credit losses.

Other Income (Expense), Net

Years Ended December 31,

2021 2020 Change $ Change %

(in thousands, except percentages)

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Total other income (expense), net $ 1,487 $ 1,801 $ (314) (17) %

Other income (expenses), net

Total other income (expense), net, decreased by $2.3 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Interest expense, including amortization of deferred debt costs, was higher for the year ended December 31, 2020 due to higher level of borrowings under our Credit Facility as compared to the prior year.

Other income, net was $1.3 million lower in the year ended December 31, 2020.

Interest income declined $2.7 million for the year ended December 31, 2020 due to a significant drop in interest rates early in the year in reaction to the COVID-19 pandemic, which impacted our investment yields.

This was offset by favorable foreign exchange totaling $1.4 million primarily related to the British Pound.

Income Tax (Benefit) Expenses

Other income (expense), net

Total other income (expense), net, decreased by $0.3 million, or 17%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The decrease was primarily driven by foreign exchange losses of $2.5 million and lower interest income of $1.4 million from a decline in interest rates, which impacted our investment yields.

This was offset by $3.1 million of other income recognized related to non-cash consideration associated with the delivery of services for a strategic commercial arrangement and decreased interest expense of $0.5 million.

Income Tax Benefit

Years Ended December 31,

2021 2020 Change $ Change %

(in thousands, except percentages)

Income tax (benefit) expense

Income tax benefit $ (5,798) $ (945) $ (4,853) 514 %

Income tax benefit arises from foreign income taxes and state income taxes in the United States.

Income tax benefit

Income tax benefit increased by $4.9 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, driven primarily by stock-based compensation excess tax benefits, increased losses in a foreign jurisdiction with no valuation allowance, and a tax rate change in a foreign jurisdiction.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents of $2,146.0 million.

Approximately 1.2% of our cash was held outside the United States in accounts held by our foreign subsidiaries which are used to fund foreign operations.

Our primary sources of cash are receipts from platform and player revenue and proceeds from equity sales including equity issued pursuant to our employee stock option plans.

The primary uses of cash are costs of revenue including third party manufacturing costs, costs to acquire advertising inventory, and content and programming license fees as well as operating expenses including payroll-related expenses, consulting and professional service fees, and facility and marketing expenses.

Other uses of cash include purchases of property and equipment.

We have multi-year lease agreements for office space and incurred material expenses in 2020.

We expect to continue to incur material expenses for facility and building related costs for our campus headquarters in San Jose, California as well as at other office locations in the U.S.

and internationally.

As our business and workforce continue to expand, we further expect ongoing purchases of computer systems and other investments in property and equipment.

In addition, w e may pursue merger and acquisition activities, including the acquisition of rights to programming and content assets that could materially impact our liquidity and capital resources.

We believe our existing cash and cash equivalents, cash flow from operations, and our undrawn available balance under our Credit Facility will be sufficient to meet our working capital requirements for at least the next twelve months.

Our future capital requirements, the adequacy of available funds, and cash flows from operations could be affected by various risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A, Risk Factors and the effects of the COVD-19 pandemic.

Less than 1% of our cash was held outside the United States in accounts held by our foreign subsidiaries, which are used to fund foreign operations.

Our primary sources of cash are receipts from platform and player revenue and proceeds from equity sales, including equity issued pursuant to our employee equity incentive plans.

The primary uses of cash are costs of revenue, including costs to acquire advertising inventory, costs to license and produce content, third-party manufacturing costs, as well as operating expenses including payroll-related expenses, consulting and professional service fees, and facility and marketing expenses.

Other uses of cash include purchases of property and equipment and mergers and acquisitions.

As our business and workforce continue to expand, we expect to continue to incur expenses for facility and building related costs for our office locations in the United States and internationally.

In addition, we expect to continue our investments in purchases of computer systems and other property and equipment.

We have pursued merger and acquisition activities, such as the acquisition of the Nielsen AVA business, the This Old House business, and content rights from Quibi, and we may pursue additional merger and acquisition activities in the future, including the acquisition of rights to programming and content assets.

These activities can materially impact our liquidity and capital resources.

We believe our existing cash and cash equivalents balance, cash flow from operations, and our undrawn available balance under our Credit Agreement will be sufficient to meet our working capital, capital expenditures, and material cash requirements from known contractual obligations for the next twelve months and beyond.

While the pandemic has not severely impacted our liquidity and capital resources to date, it has contributed to disruption and volatility in local economies and in capital and credit markets, which could adversely affect our liquidity and capital resources in the future.

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At-the-Market Offering

On May 13, 2020, we entered into an Equity Distribution Agreement with Morgan Stanley & Co.

LLC and Citigroup Global Markets Inc., as our sales agents, pursuant to which we sold an aggregate of 4.0 million shares of our Class A common stock and received gross proceeds of $504.0 million at an average selling price of $126.01 per share and incurred issuance costs of $6.8 million.

On March 2, 2021, we entered into an Equity Distribution Agreement with Morgan Stanley & Co.

LLC, Citigroup Global Markets Inc., and Evercore Group L.L.C., as our sales agents, pursuant to which we could offer and sell from time-to-time shares of our Class A common stock for aggregate gross proceeds of up to $1,000.0 million.

In March 2021, we sold approximately 2.6 million shares of Class A common stock at an average selling price of $379.26 per share, for aggregate gross proceeds of $1,000.0 million and incurred issuance costs of $10.4 million.

Senior Secured Term Loan A and Revolving Credit Facilities

On February 19, 2019 (the “Original Closing Date”), we entered into a Credit Agreement (the “Existing Credit Agreement”) with Morgan Stanley Senior Funding, Inc.

On May 3, 2019, (the “Closing Date”), the Existing Credit Agreement was amended pursuant to an Incremental Assumption and Amendment No.

1 (the “Amendment” and the Existing Credit Agreement as amended by the Amendment, the “Credit Agreement”).

The Credit Agreement provides for (i) a four-year revolving credit facility in the aggregate principal amount of up to $100.0 million (the “Revolving Credit Facility”), (ii) a four-year delayed draw term loan A facility in the aggregate principal amount of up to $100.0 million (the “Term Loan A Facility”) and (iii) an uncommitted incremental facility, subject to the satisfaction of certain financial and other conditions, in the amount of up to (v) $50.0 million, plus (w) 1.0x of our consolidated EBITDA for the most recently completed four fiscal quarter period, plus (x) an additional amount at our discretion, so long as, on a pro forma basis at the time of incurrence, our secured leverage ratio does not exceed 1.50 to 1.00, plus (y) voluntary prepayments of the Revolving Credit Facility and Term Loan A Facility to the extent accompanied by concurrent reductions to the applicable Credit Facility (together with the Revolving Credit Facility and the Term Loan A Facility, collectively, the “Credit Facility”).

On February 19, 2019, we entered into a Credit Agreement with Morgan Stanley Senior Funding, Inc.

(as amended on May 3, 2019, the “Credit Agreement”), which provides for (i) a four-year revolving credit facility in the aggregate principal amount of up to $100.0 million (the “Revolving Credit Facility”), (ii) a four-year delayed draw term loan A facility in the aggregate principal amount of up to $100.0 million (the “Term Loan A Facility”), and (iii) an uncommitted incremental facility subject to certain conditions (together with the Revolving Credit Facility and the Term Loan A Facility, collectively, the “Credit Facility”).

For our current borrowings, we have elected a Eurodollar borrowing with interest at a rate equal to the adjusted one-month LIBOR rate plus an applicable margin of 1.75% based on our secured leverage ratio.

The borrowings under the facility mature or have to repaid in full by February 2023.

The borrowings under the facility mature or have to be repaid in full by February 2023.

Our obligations under the Credit Agreement are secured by substantially all of our assets.

The Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires us to maintain a certain adjusted quick ratio of at least 1.00 to 1.00, and cu stomary events of default.

As of December 31, 2021, we were in compliance with all of the covenants of the Credit Agreement.

See Note 10 to the consolidated financial statements in Item 8 of this Report, for additional details regarding the Credit Agreement.

We had outstanding letters of credit of $30.8 million and $30.7 million as of December 31, 2020 and December 31, 2019, respectively, against the Revolving Credit Facility.

See Note 10 to the consolidated financial statements in Item 8 of this Annual Report for additional details regarding the Credit Agreement.

We had outstanding letters of credit of $38.0 million and $30.8 million as of December 31, 2021 and 2020, respectively, against the Revolving Credit Facility.

The following table summarizes our cash flows for the periods presented (in thousands):

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Our operating activities provided cash of $228.1 million for the year ended December 31, 2021.

Our net loss of $17.5 million for the year ended December 31, 2020 was adjusted by non-cash charges of $225.7 million comprising mainly of $134.1 million of stock-based compensation, $36.2 million of depreciation and amortization primarily on property and equipment and acquired intangible assets, $28.7 million of amortization of operating lease right-of-use assets, $22.4 million of amortization of capitalized licensed content assets and $3.8 million of provision for doubtful accounts.

The changes in our operating assets and liabilities used cash of $60.0 million comprised of outflows of $196.0 million from an increase in accounts receivable primarily driven by higher sales volume in the last quarter , $4.2 million from increased inventory levels

at the end of the year, $3.5 million from an increase in prepaid and other current assets due to an increase in contract assets, prepaid taxes and other general expenses , and $1.1 million from an increase in other long term assets.

These outflows were offset by cash inflows by an increase of $103.2 million from an increase in accrued liabilities related to content publisher payables, marketing, retail and merchandising costs, advertising inventory costs and overall growth in the volume of business , $21.5 million from an increase in deferred revenue due to overall growth in the volume of business, $13.0 million from an increase in operating lease liabilities for new leases added during the year, $6.4 million from an increase in accounts payable, and $0.6 million from an increase in other long-term liabilities.

Our operating activities provided cash of $13.7 million for the year ended December 31, 2019.

Our net loss of $59.9 million for the year ended December 31, 2019 was adjusted by non-cash charges of $127.9 million comprising mainly of $85.2 million of stock-based compensation and $15.7 million of depreciation and amortization primarily on property and equipment and acquired intangible assets, $22.3 million of amortization of operating right-of-use assets and $2.9 million of amortization of capitalized licensed content assets.

The changes in our operating assets and liabilities used cash of $54.2 million comprised of outflows of $110.2 million from an increase in accounts receivable due to increased seasonal revenues in the fourth quarter, $14.1 million from increasing inventory levels, $10.6 million from a decrease in deferred revenue, $9.9 million from an increase in prepaid and other current assets due to an increase in prepaid contracts, marketing expenses and prepaid capital expenditure for new facilities, $3.0 million from a decrease in other long-term liabilities, and $3.0 million from an increase in other long-term assets.

These outflows were offset by cash inflows of $74.5 million from an increase in accrued liabilities due to timing of payments, increased content publishers payables, and overall growth in the volume of business , $11.7 million from an increase in operating lease liabilities, $9.4 million from an increase in accounts payable, and $1.1 million from a decrease in deferred cost of revenue.

Cash Flow from Investing Activities

Our investing activities used cash of $81.3 million for the year ended December 31, 2020.

The cash used comprised of $82.4 million for the purchase of property and equipment, which primarily related to expenditures on leasehold improvements related to expanding our facilities and other capital investments, partially offset by $1.1 million of cash received from proceeds from the resolution of purchase acquisition contingencies.

Our investing activities used cash of $110.3 million for the year ended December 31, 2019.

The cash used comprised of $77.2 million for the purchase of property and equipment, which primarily related to expenditures on leasehold improvements related to expanding our facilities and other capital investments, $68.1 million related to the acquisition of dataxu, Inc., $12.4 million spent on the purchase of short-term investments, and $7.4 million related to the purchases of other intangible assets, partially offset by $54.8 million received from sales/maturities of short-term investments.

Cash Flow from Financing Activities

Our financing activities provided cash of $509.0 million for the year ended December 31, 2020.

The cash was received mainly from net proceeds from the issuance of common stock through our at-the-market offering amounting to $497.2 million, net of offering costs and proceeds from the exercise of employee stock options of $16.8 million.

We borrowed and repaid $69.3 million of our Revolving Credit Facility in addition to the repayments of $5.0 million on our Term Loan A during the year.

Our net income of $242.4 million for the year ended December 31, 2021 was adjusted by non-cash charges of $355.7 million comprised mainly of stock-based compensation, amortization of content assets, depreciation and amortization on property and equipment and intangible assets, and amortization of operating right-of-use assets.

The changes in our operating assets and liabilities used cash of $370.0 million mainly from an increase in accounts receivable primarily driven by an increase in revenue, an increase in content assets, an increase in contract assets from revenue recognized from customers, payments made for operating lease liabilities, and a decrease in deferred revenue offset by inflows from an increase in accounts payable and accrued liabilities and a decrease in inventory balances.

These changes are mainly due to overall growth in the business combined with the timing of receipts from customers and payments to vendors.

Cash Flows from Investing Activities

Our investing activities for the year ended December 31, 2021 included cash outflows of $176.8 million comprised of $136.8 million for the acquisition of businesses, mainly the Nielsen AVA business and This Old House, and $40.0 million for purchases of property and equipment and expenditures on leasehold improvements.

Cash Flows from Financing Activities

Our financing activities provided cash of $1,003.1 million for the year ended December 31, 2021.

The cash was received mainly from net proceeds from the issuance of Class A common stock through our at-the-market offerings amounting to $330.5 million, net of offering costs, proceeds from borrowings amounting to $99.6 million, net of issuance costs, and proceeds from the exercise of employee stock options of $28.2 million.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the years ended December 31, 2020 and 2019, as defined by applicable SEC rules and regulations.

Contractual Obligations

Our future minimum payments under our non-cancelable contractual obligations were as follows as of December 31, 2020 (in thousands):

Payments Due by Period

Term Loan A Facility (1)

Purchase commitments (2)

Operating lease obligations (3)

Other obligations (4)

Represents the principal amount of Term Loan A Facility.

For additional information regarding the terms of the debt and interest payable, see Note 10 to the consolidated financial statements in Item 8 of this Report.

Represents commitments to purchase finished goods from our contract manufacturer and other inventory related items.

Represents future minimum lease payments under operating leases.

Represents commitments included in other non- cancelable arrangements like licensed content assets, advertising inventory costs and other platform services.

We rely on an outsourced supplier to manufacture, assemble and test our players and audio devices.

Consistent with industry practices, we enter into firm, noncancelable, and unconditional purchase commitments to acquire products through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.

Our contract manufacturer sources components and builds our products based on these demand forecasts.

Changes to projected demand or in the subsequent sales mix of our products, may result in us being committed to purchase excess inventory to satisfy these commitments.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.

Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table does not include $29.2 million of such non-current liabilities not included in our consolidated balance sheets as of December 31, 2020.

The cash was received mainly from proceeds from an at-the-market offering of $989.6 million, net of issuance costs, and proceeds from the exercise of employee stock options of $18.5 million.

These inflows were offset by $5.0 million of repayments made on borrowings.

Material Cash Requirements from Known Contractual Obligations

Our material cash requirements from known contractual obligations as of December 31, 2021 consisted of:

• Principal payments related to our Term Loan A Facility that are included in our consolidated balance sheets and the related periodic interest payments.

For additional information regarding the terms of the debt and interest payable, see Note 10 to the consolidated financial statements in Item 8 of this Annual Report.

• Commitments to purchase finished goods from our contract manufacturers and other inventory related items.

Consistent with industry practices, we enter into firm, non-cancelable, and unconditional purchase commitments with our contract manufacturers to acquire products through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.

Our contract manufacturers source components and build our products based on these demand forecasts.

Changes to projected demand or in the subsequent sales mix of our products may result in us being committed to purchase excess inventory to satisfy

these commitments.

For additional information regarding manufacturing purchase commitments, see Note 12 to the consolidated financial statements in Item 8 of this Annual Report.

• Commitments to license content from content publishers under contractual arrangements.

For additional information regarding licensed content commitments, see Note 12 to the consolidated financial statements in Item 8 of this Annual Report.

• Operating lease liabilities that are included in our consolidated balance sheets and liabilities related to the lease arrangements that have not yet commenced.

For additional information regarding our lease liabilities, see Note 9 to the consolidated financial statements in Item 8 of this Annual Report.

The contractual commitments discussed above are associated with agreements that are enforceable and legally binding.

Obligations under contracts that we can cancel without a significant penalty are not included above.

In addition, we have $ 66.2 million of unrecognized income tax benefits, for which we are unable to reasonably predict the timing of settlement of liabilities.

These income tax benefits are not recognized in our consolidated balance sheets as of December 31, 2021.

Critical Accounting Policies and Estimates

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Our contracts with customers often include promises to transfer multiple products and services to a customer.

Determining whether products and services are considered distinct performance obligations may require significant judgment.

Determining whether products and services are considered distinct performance obligations requires significant judgment.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation.

For performance obligations routinely sold separately, the SSP is determined by evaluating such stand-alone sales.

performance obligations that are not routinely sold separately, we determine SSP using information that may include market conditions and other observable inputs.

To the extent platform services are part of multiple element arrangement, revenue recognition of each performance obligation in the estimated transaction price of a contract is based on the expected value for which a significant reversal of revenue is not expected to occur.

For those performance obligations that are not routinely sold separately, we determine SSP using information that may include market conditions and other observable inputs.

To the extent platform services are part of multiple element arrangements, revenue recognition of each performance obligation in the estimated transaction price of a contract is based on the expected value for which a significant reversal of revenue is not expected to occur.

The estimate of the variable consideration is based on the assessment of historical, current, and forecasted performance noted and expected from the performance obligation.

For the sale of third-party goods and services, we evaluate whether we are the principal, and report revenues on a gross basis, or an agent, and report revenues on a net basis.

For the sale of third-party goods and services, we evaluate whether we are the principal, and report revenue on a gross basis, or an agent, and report revenue on a net basis.

In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.

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We use our best estimates and assumptions to accurately assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include, but are not limited to, future expected cash inflows and outflows, expected technology life cycle, attrition rates of customers, and discount rates.

rates of customers, and discount rates.

We estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.

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While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets and liabilities acquired, these estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets and liabilities acquired, with the corresponding offset to goodwill to the extent we identify adjustments to the preliminary purchase price allocation.

Upon the conclusion of the measurement period or final determination of the values of assets and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Goodwill and Intangible Assets

We test goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or when specific circumstances dictate, between annual tests.

We measure recoverability of goodwill at the reporting unit level.

The process of determining the fair value of a reporting unit is highly subjective and involves the use of significant estimates and assumptions.

In performing our annual assessment, we can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or we can directly perform a quantitative assessment.

Based on our qualitative assessment, if we determine that the fair value of our reporting unit is, more likely than not, less than its carrying amount, then the quantitative assessment is performed.

Any excess of the reporting unit's carrying amount over its fair value will be recorded as an impairment loss.

During the measurement period, which may be up to one year from the acquisition date, we record adjustments to consideration transferred, and the assets and liabilities acquired, with the corresponding offset to goodwill to the extent we identify adjustments to the preliminary purchase price allocation.

Upon the conclusion of the measurement period or final determination of the values of consideration transferred, and assets and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Impairment of Intangible Assets

We identify intangible assets acquired in a business combination and determine their fair value.

The determination involves certain judgments and estimates.

These judgments include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate discount weighted-average cost of capital.

These judgments include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate discount rate.

We amortize purchased-intangible assets on a straight-line basis over the estimated useful life of the assets.

We review purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable.

If such facts and circumstances indicate an asset’s carrying amount may not be recoverable, we assess the recoverability of purchased-intangible assets by comparing the projected

undiscounted net cash flows associated with the asset group against their respective carrying amounts.

We review purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated, or that the carrying amount of the asset group to which it relates may not be recoverable.

If such facts and circumstances indicate an asset group’s carrying amount may not be recoverable, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the asset group against their respective carrying amounts.

Impairment, if any, is based on the excess of the carrying amount over the fair value of these asset groups.

If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Allowances for Sales Returns, Sales Incentives and Doubtful Accounts

Accounts receivable are stated at invoice value less estimated allowances for sales returns, sales incentives and doubtful accounts which is our best estimate of the amount of probable credit losses in our existing accounts receivable.

Allowances for Sales Returns and Sales Incentives

Accounts receivable are stated at invoice value less estimated allowances that include allowance for sales returns and sales incentives.

We perform an ongoing analysis of various factors including our historical experience, promotional programs, claims to date, and other business factors to determine the allowances for sales returns and sales incentives.

We assess collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with collectability issues and determine the allowance for doubtful accounts.

We regularly review the allowance by considering historical collectability based on past due status, credit quality, and make judgments about the creditworthiness of customers based on ongoing credit evaluations.

We consider customer-specific information and current economic conditions that may affect a customer’s ability to pay.

If our estimates regarding accounts receivable allowances differ from the actual results, the losses or gains could be material.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment.

We account for the fair value of restricted stock units using the closing market price of our Class A common stock on the date of the grant.

We use the Black-Scholes option-pricing model to determine the fair value of stock options.

The determination of the grant date fair value of stock options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables.

These variables include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

Fair Value of Our Common Stock .

We use the closing market price for our Class A common stock as reported on The Nasdaq Global Select Market on the date of grant.

Expected Term.

The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding.

To determine the expected term, we generally apply the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award as we do not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term.

As we do not have sufficient trading history for our Class A common stock, the expected volatility for our Class A common stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option awards.

Industry peers consist of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage.

We intend to consistently apply this process until a sufficient amount of historical information regarding the volatility of our own Class A common stock share price becomes available or unless circumstances change such that the identified peer companies are no longer similar to us, in which case, more suitable companies whose share prices are available would be utilized in the calculation.

Risk-free Rate.

The risk-free interest rate is based on the yields of U.S.

Treasury securities with maturities similar to the expected term for each of our stock options.

Dividend Yield.

We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

Consequently, we use an expected dividend yield of zero.

We account for forfeitures as they occur.

If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

We will continue to use judgement in evaluating assumptions related to our stock-based compensation cost.

As we continue to accumulate additional data related to our Class A common stock and our business evolves, we may have refinements to our assumptions and estimates which could impact our future stock-based compensation cost.

Provision for Income Taxes

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A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized.

We have established a full valuation allowance to offset domestic net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets.

We have established a full valuation allowance to offset U.S.

and Netherlands net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets.

Our valuation allowance is attributable to the uncertainty of realizing future tax benefits from U.S.

net operating losses and other deferred tax assets.

and Netherlands net operating losses and other deferred tax assets.

In order to assess the likelihood that we will recover our deferred tax assets against future sources of taxable income, we review the level of positive and negative evidence of future taxable income which is a critical estimate.

Recent Accounting Pronouncements

The recent accounting pronouncements adopted during the year ended December 31, 2020 and those not yet adopted are discussed and included in Note 2 to the consolidated financial statements in Item 8 of this Report.

The recent accounting pronouncements adopted during the year ended December 31, 2021 and those not yet adopted are discussed and included in Note 2 to the consolidated financial statements in Item 8 of this Annual Report.

They are incorporated herein by reference.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis