ROKU, INC 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 64 Consolidated Balance Sheets 66 Consolidated Statements of Operations 67 Consolidated Statements of Comprehensive Income (Loss ) 68 Consolidated Statements of Stockholders’ Equity 69 Consolidated Statements of Cash Flows 70 Notes to Consolidated Financial Statements 72 63 Table o f Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Roku, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Roku, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition - Variable Consideration Determination of Content Distribution Services and Branded Channel Buttons – Refer to Note 2 to the financial statements Critical Audit Matter Description As part of the Company’s revenue recognition for its arrangements with content publishers, management is required to estimate variable consideration from transactional revenue sharing related to content distribution services and the sale of branded channel buttons on remote controls. Variable consideration related to content distribution services and sale of branded channel buttons on remote controls (“content publisher arrangements”) is included in the estimated transaction price based on the expected value for which a significant reversal of revenue is not expected to occur. For content distribution services, the estimate of the variable consideration is based on management’s assessment of historical, current, and forecasted performance of the publisher’s applications. For the sale of branded channel buttons on remote controls, the estimate of the variable consideration is based on management’s assessment of historical, current, and forecasted player sales volumes. 64 Table o f Contents We identified the revenue forecasts relating to content publisher arrangements as a critical audit matter due to the significant judgment necessary to estimate variable consideration. Such estimates required a high degree of auditor judgment and an increased extent of effort relative to evaluating the reasonableness of management’s estimates and assumptions related to the forecasts of variable consideration. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s forecast used in the determination of future variable consideration included the following, among others: • We tested the effectiveness of controls over management’s forecasting process related to content distribution services and sale of branded channel buttons on remote controls. • We selected a sample of revenue arrangements with variable consideration and performed the following: ◦ Obtained contractual documents for each selection, including master agreements and other related documents. ◦ Analyzed the contractual documents to determine if all arrangement terms that may have an impact on revenue recognition were identified and properly considered in the evaluation of the accounting for the contract, including terms and conditions for transactional revenue sharing. ◦ Performed inquiries with applicable individuals in the Company’s finance, operations, and sales departments regarding the estimates for content distribution services and sales of branded channel buttons on remote controls. ◦ Tested management’s accuracy of forecasting by comparing the historical forecasts of consideration to actual consideration received. ◦ Evaluated changes from prior period forecasts to current period forecasts, when applicable. ◦ Tested the mathematical accuracy of the compilation of the forecasts. ◦ We considered the existence of contradictory evidence based on reading of internal communication to management, Company press releases, industry reports, publicly available information related to publishers’ content applications as well as our observations and inquiries as to the changes within the business and considerations of macroeconomic and industry factors. /s/ DELOITTE & TOUCHE LLP San Jose, California February 16, 2023 We have served as the Company's auditor since 2008. 65 Table o f Contents ROKU, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value data) As of December 31, 2022 2021 Assets Current Assets: Cash and cash equivalents $ 1,961,956 $ 2,146,043 Accounts receivable, net of allowances of $ 40,191 and $ 56,827 as of 760,793 752,393 December 31, 2022 and 2021, respectively Inventories 106,747 50,276 Prepaid expenses and other current assets 135,383 105,795 Total current assets 2,964,879 3,054,507 Property and equipment, net 335,031 177,567 Operating lease right-of-use assets 521,695 345,660 Content assets, net 292,766 223,713 Intangible assets, net 58,881 84,126 Goodwill 161,519 161,519 Other non-current assets 77,830 35,053 Total Assets $ 4,412,601 $ 4,082,145 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable $ 164,800 $ 124,921 Accrued liabilities 750,810 549,055 Current portion of long-term debt 79,985 9,883 Deferred revenue, current portion 87,678 45,760 Total current liabilities 1,083,273 729,619 Long-term debt, non-current portion — 79,985 Deferred revenue, non-current portion 28,210 28,726 Operating lease liability, non-current portion 584,651 394,724 Other long-term liabilities 69,911 82,485 Total Liabilities 1,766,045 1,315,539 Commitments and contingencies (Note 13) Stockholders’ Equity: Common stock, $ 0.0001 par value; 14 14 1,150,000 (Class A - 1,000,000 and Class B - 150,000 ) shares authorized as of December 31, 2022 and 2021; 140,027 (Class A - 122,602 and Class B - 17,425 ) shares and 135,137 (Class A - 118,767 and Class B - 16,370 ) shares issued and outstanding as of December 31, 2022 and 2021, respectively Additional paid-in capital 3,234,860 2,856,572 Accumulated other comprehensive income (loss) ( 292 ) 41 Accumulated deficit ( 588,026 ) ( 90,021 ) Total stockholders’ equity 2,646,556 2,766,606 Total Liabilities and Stockholders’ Equity $ 4,412,601 $ 4,082,145 See accompanying Notes to Consolidated Financial Statements 66 Table o f Contents ROKU, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years Ended December 31, 2022 2021 2020 Net Revenue: Platform $ 2,711,441 $ 2,264,920 $ 1,247,654 Devices 415,093 499,664 530,734 Total net revenue 3,126,534 2,764,584 1,778,388 Cost of Revenue: Platform 1,179,675 818,506 499,520 Devices 505,737 537,478 470,649 Total cost of revenue 1,685,412 1,355,984 970,169 Gross Profit (Loss): Platform 1,531,766 1,446,414 748,134 Devices ( 90,644 ) ( 37,814 ) 60,085 Total gross profit 1,441,122 1,408,600 808,219 Operating Expenses: Research and development 788,913 461,602 355,784 Sales and marketing 838,419 455,601 299,457 General and administrative 344,678 256,297 173,231 Total operating expenses 1,972,010 1,173,500 828,472 Income (Loss) from Operations ( 530,888 ) 235,100 ( 20,253 ) Other Income (Expense), Net: Interest expense ( 5,161 ) ( 2,980 ) ( 3,432 ) Other income (expense), net 43,766 4,467 5,233 Total other income (expense), net 38,605 1,487 1,801 Income (Loss) Before Income Taxes ( 492,283 ) 236,587 ( 18,452 ) Income tax expense (benefit) 5,722 ( 5,798 ) ( 945 ) Net Income (Loss) $ ( 498,005 ) $ 242,385 $ ( 17,507 ) Net income (loss) per share — basic $ ( 3.62 ) $ 1.83 $ ( 0.14 ) Net income (loss) per share — diluted $ ( 3.62 ) $ 1.71 $ ( 0.14 ) Weighted-average common shares outstanding — basic 137,668 132,710 123,978 Weighted-average common shares outstanding — diluted 137,668 141,668 123,978 See accompanying Notes to Consolidated Financial Statements 67 Table o f Contents ROKU, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Years Ended December 31, 2022 2021 2020 Net Income (Loss) $ ( 498,005 ) $ 242,385 $ ( 17,507 ) Other comprehensive gain (loss), net of tax: Foreign currency translation adjustment ( 333 ) 12 — Other comprehensive gain (loss), net of tax ( 333 ) 12 — Comprehensive Income (Loss) $ ( 498,338 ) $ 242,397 $ ( 17,507 ) See accompanying Notes to Consolidated Financial Statements 68 Table o f Contents ROKU, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balance-December 31, 2019 119,897 $ 12 $ 1,012,218 $ 29 $ ( 313,833 ) $ 698,426 Vesting of early exercised stock options — — 38 — — 38 Issuance of common stock pursuant to equity incentive plans 4,107 1 16,805 — — 16,806 Issuance of common stock in connection with at-the-market offering, net of issuance costs of $ 6,800 4,000 — 497,242 — — 497,242 Stock-based compensation expense — — 134,076 — — 134,076 Adoption of ASU 2016-13 — — — — ( 1,066 ) ( 1,066 ) Net loss — — — — ( 17,507 ) ( 17,507 ) Balance-December 31, 2020 128,004 13 1,660,379 29 ( 332,406 ) 1,328,015 Vesting of early exercised stock options — — 4 — — 4 Issuance of common stock pursuant to equity incentive plans 4,496 1 18,531 — — 18,532 Issuance of common stock in connection with at-the-market offering, net of issuance costs of $ 10,400 2,637 — 989,615 — — 989,615 Stock-based compensation expense — — 188,043 — — 188,043 Foreign currency translation adjustment — — — 12 — 12 Net income — — — — 242,385 242,385 Balance-December 31, 2021 135,137 14 2,856,572 41 ( 90,021 ) 2,766,606 Issuance of common stock pursuant to equity incentive plans 4,890 — 18,357 — — 18,357 Stock-based compensation expense — — 359,931 — — 359,931 Foreign currency translation adjustment — — — ( 333 ) — ( 333 ) Net loss — — — — ( 498,005 ) ( 498,005 ) Balance-December 31, 2022 140,027 $ 14 $ 3,234,860 $ ( 292 ) $ ( 588,026 ) $ 2,646,556 See accompanying Notes to Consolidated Financial Statements 69 Table o f Contents ROKU, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 498,005 ) $ 242,385 $ ( 17,507 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 48,651 42,621 36,206 Stock-based compensation expense 359,931 187,532 134,076 Amortization of right-of-use assets 55,507 31,024 28,743 Amortization of content assets 234,355 95,570 22,392 Foreign currency remeasurement (gains) losses ( 8,230 ) — — Change in fair value of strategic investment 532 — — Impairment of intangible assets 7,500 — — Provision for (recoveries of) doubtful accounts 2,081 ( 904 ) 3,801 Other items, net ( 190 ) ( 101 ) 524 Changes in operating assets and liabilities: Accounts receivable ( 10,887 ) ( 221,768 ) ( 196,046 ) Inventories ( 56,471 ) 3,619 ( 4,181 ) Prepaid expenses and other current assets ( 15,941 ) ( 48,074 ) ( 3,450 ) Content assets and liabilities, net ( 313,204 ) ( 193,440 ) ( 22,721 ) Other non-current assets ( 7,304 ) ( 19,335 ) ( 1,128 ) Accounts payable 14,190 8,428 6,410 Accrued liabilities 167,526 128,931 127,319 Operating lease liabilities ( 9,245 ) ( 20,083 ) 12,999 Other long-term liabilities ( 403 ) ( 1,100 ) ( 762 ) Deferred revenue 41,402 ( 7,224 ) 21,517 Net cash provided by operating activities 11,795 228,081 148,192 Cash flows from investing activities: Purchases of property and equipment ( 161,696 ) ( 40,041 ) ( 82,382 ) Acquisition of businesses, net of cash acquired — ( 136,778 ) — Proceeds from escrows associated with acquisition — — 1,058 Purchase of strategic investment ( 40,000 ) — — Net cash used in investing activities ( 201,696 ) ( 176,819 ) ( 81,324 ) Cash flows from financing activities: Proceeds from borrowings, net of issuance costs — — 69,325 Repayments of borrowings ( 10,000 ) ( 5,000 ) ( 74,325 ) Proceeds from equity issued under incentive plans 18,357 18,532 16,806 Proceeds from equity issued under at-the-market offerings, net of offering costs — 989,615 497,242 Net cash provided by financing activities 8,357 1,003,147 509,048 Net increase (decrease) in cash, cash equivalents and restricted cash ( 181,544 ) 1,054,409 575,916 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 4,170 ) 12 — Cash, cash equivalents and restricted cash —Beginning of period 2,147,670 1,093,249 517,333 Cash, cash equivalents and restricted cash —End of period $ 1,961,956 $ 2,147,670 $ 1,093,249 Cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents 1,961,956 2,146,043 1,092,815 Restricted cash, current — — 434 Restricted cash, non-current — 1,627 — Cash, cash equivalents and restricted cash —End of period $ 1,961,956 $ 2,147,670 $ 1,093,249 70 Table o f Contents Years Ended December 31, 2022 2021 2020 Supplemental disclosures of cash flow information: Cash paid for interest $ 3,894 $ 2,578 $ 3,470 Cash paid for income taxes $ 7,016 $ 1,363 $ 1,014 Supplemental disclosures of non-cash investing and financing activities: Non-cash consideration for business combination $ — $ 21,400 $ — Services to be received as part of a business combination $ — $ 6,500 $ — Unpaid portion of property and equipment purchases $ 28,503 $ 3,073 $ 1,242 See accompanying Notes to Consolidated Financial Statements 71 Table o f Contents ROKU, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Organization and Description of Business Roku, Inc. (the “Company” or “Roku”), was formed in October 2002 as Roku LLC under the laws of the State of Delaware. On February 1, 2008, Roku LLC was converted into Roku, Inc., a Delaware corporation. The Company operates in two reportable segments and generates platform revenue from the sale of digital advertising and related services including demand-side platform and 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. The Company generates devices revenue from the sale of streaming players, audio products, smart home products and licensing arrangements with service operators and licensed Roku TV partners. 2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION Basis of Presentation and Principles of Consolidation The consolidated financial statements, which include the accounts of Roku, Inc. and its wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. Reorganization of Reportable Segments and Reclassification of Prior Year Presentation Effective as of the fourth quarter of fiscal 2022, the Company reorganized its reportable segments to better align with management’s reporting of information reviewed by the CODM for each segment. The Company renamed the player segment to the devices segment which now includes licensing arrangements with service operators and licensed Roku TV partners in addition to sales of streaming players, audio products and smart home products. All financial information, current and historical, has been recast based on the reorganized segments to conform to the new presentation in the financial statements and accompanying notes. See Note 18 for additional details. In addition to the prior period amounts related to segment reorganization discussed above, certain other prior period amounts in the consolidated financial statements and accompanying notes have also been reclassified to conform to the current period presentation. Use of Estimates The preparation of the Company’s consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses. Significant items subject to such estimates and assumptions include: • revenue recognition: determining the nature and timing of satisfaction of performance obligations, variable consideration, determining the stand-alone selling prices of performance obligations, gross versus net revenue recognition, and evaluation of customer versus vendor relationships; • the impairment of intangible assets; • amortization of content assets; • valuation of assets acquired and liabilities assumed in connection with business combinations; • valuation of strategic investments; • useful lives of tangible and intangible assets; • allowances for sales returns and sales incentives; and • the valuation of deferred income tax assets. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates and assumptions. Comprehensive Income (Loss) Comprehensive income (loss) for the year ended December 31, 2022 and December 31, 2021 includes foreign currency translation adjustments. Comprehensive loss is equal to the net loss for the year ended December 31, 2020. 72 Table o f Contents Foreign Currency The functional currency of some of the Company’s foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of these subsidiaries are remeasured into U.S. dollars from the local currency at exchange rates in effect at period-end and non-monetary assets and liabilities are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period. Foreign currency gains or losses from remeasurement and transaction gains or losses are recorded as Other income (expense), net in the consolidated statements of operations. The Company recorded a foreign currency gain of $ 8.2 million, loss of $ 1.2 million, and gain of $ 1.3 million during the years ended December 31, 2022, 2021, and 2020, respectively. The Company also has some foreign subsidiaries which use local currency as their functional currency. The financial statements of these subsidiaries are translated to U.S. dollars using month-end exchange rates for assets and liabilities, and average exchange rates for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders' equity. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Two financial institutions managed 26 % and 21 % of cash and cash equivalents as of December 31, 2022, and 30 % and 27 % as of December 31, 2021. Accounts Receivable, net Accounts receivable are typically unsecured and are derived from revenue earned from customers. They are stated at invoice value less estimated allowances for sales returns, sales incentives, doubtful accounts, and other miscellaneous allowances. The Company performs ongoing credit evaluations of its customers to determine allowances for potential credit losses and doubtful accounts. The Company considers historical experience, ongoing promotional activities, historical claim rates, and other factors to determine the allowances for sales returns and sales incentives. Allowance for Sales Returns : Allowance for sales returns consisted of the following activities (in thousands): Years Ended December 31, 2022 2021 2020 Beginning balance $ 6,015 $ 5,912 $ 6,550 Add: Charged to revenue 19,068 16,181 14,594 Less: Utilization of sales return reserve ( 17,666 ) ( 16,078 ) ( 15,232 ) Ending balance $ 7,417 $ 6,015 $ 5,912 Allowance for Sales Incentives : Allowance for sales incentives consisted of the following activities (in thousands): Years Ended December 31, 2022 2021 2020 Beginning balance $ 48,411 $ 30,838 $ 19,476 Add: Charged to revenue 94,731 90,530 68,315 Less: Utilization of sales incentive reserve ( 114,239 ) ( 72,957 ) ( 56,953 ) Ending balance $ 28,903 $ 48,411 $ 30,838 73 Table o f Contents Allowance for Doubtful Accounts : Allowance for doubtful accounts consisted of the following activities (in thousands): Years Ended December 31, 2022 2021 2020 Beginning balance $ 2,158 $ 4,181 $ 1,140 Impact of adoption of ASU 2016-13 — — 1,066 Adjusted beginning balance $ 2,158 $ 4,181 $ 2,206 Provision for (recoveries of) doubtful accounts 2,081 ( 904 ) 3,801 Adjustments for write-off ( 741 ) ( 1,119 ) ( 1,826 ) Ending balance $ 3,498 $ 2,158 $ 4,181 The Company did not have any customer that individually accounted for more than 10% of its accounts receivable, net balance as of December 31, 2022 and 2021. Business Combinations The Company determines whether a transaction meets the definition of a business combination before applying the acquisition method of accounting to that transaction. The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The operating results of acquired businesses are included in the Company’s consolidated statements of operations from their effective acquisition date. Acquisition-related expenses and certain acquisition restructuring and other related charges are recognized separately from the business combination and are expensed as incurred. Contingent consideration classified as a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, 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, the Company may record adjustments to consideration transferred, and the assets acquired and liabilities assumed with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions and records any adjustments to the Company’s preliminary estimates with a corresponding offset to goodwill during the measurement period. Upon the conclusion of the measurement period or final determination of the values of consideration transferred, and assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Intangible Assets Intangible assets acquired through business combinations are recorded at their fair values as of the acquisition date. Intangible assets are amortized using the straight-line method over their estimated useful lives. The Company evaluates the estimated remaining useful lives of its intangible assets annually and when events or changes in circumstances warrant a revision to the remaining periods of amortization. Impairment Assessments The Company evaluates goodwill for possible impairment at least annually during the fourth quarter of each fiscal year or more often, if and when circumstances indicate that goodwill may be impaired. This includes but is not limited to significant adverse changes in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. In performing its annual assessment, the Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or it can directly perform a quantitative assessment. Based on the Company’s qualitative assessment, if it is determined that the fair value of the 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 is recorded as an impairment loss, limited to the total amount of goodwill allocated to the reporting unit. 74 Table o f Contents The Company reviews long-lived assets and intangible assets with finite lives for impairment when events or changes in business circumstances indicate that the carrying amount of the asset or asset group may not be fully recoverable or that the useful lives of the asset or asset group are no longer appropriate. The Company assesses these asset or asset groups for impairment based on their estimated undiscounted future cash flows. If the carrying value of the asset or asset group exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the asset group. The Company did not recognize any impairment for goodwill in any of the periods reported. During the year ended December 31, 2022, the Company recognized an impairment charge of $ 7.5 million related to the abandonment of future development of certain technology assets. This action was taken as part of the restructuring announced in the fourth quarter of fiscal year 2022. See Note 15 for additional details. There were no impairments of intangible assets during the years ended December 31, 2021 and 2020. Content Assets The Company recognizes content assets (licensed and produced) as Content assets, net on the consolidated balance sheets. For licensed content, the cost per title is capitalized along with a corresponding liability when the license period begins, the content is available for streaming and when the fee is determinable. For produced content, all direct production costs are capitalized. Payment terms for certain licensed content require advanced payments which are reflected in Prepaid expenses and other current assets. The amortization expense for content assets (licensed and produced) is based on projected usage which results in accelerated or straight-lined patterns depending on the nature of the content. Projected usage is mainly based on estimated viewing trends. Amortization of content assets is included in Cost of revenue, platform in the consolidated statements of operations. Content assets (licensed and produced) are primarily monetized together as a unit, referred to as a film group. The film group is evaluated for impairment whenever an event occurs, or circumstances change, indicating the fair value is less than the carrying value. The Company reviews various qualitative factors and indicators to assess whether the film group is impaired. The Company did not recognize any impairment of content assets in any periods reported. Revenue Recognition Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company’s contracts include various product or services or a combination of both, which are generally capable of being distinct and are accounted for as separate performance obligations. The Company’s contracts often contain multiple distinct performance obligations. The Company estimates the transaction price of a contract 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. In arrangements with multiple performance obligations, the estimated transaction price of each contract is allocated to each distinct performance obligation based on relative stand-alone selling price (“SSP”). For performance obligations routinely sold separately, the SSP is determined by evaluating such stand-alone sales. For those performance obligations that are not routinely sold separately, the SSP is determined based on market conditions and other observable inputs. When the Company sells third-party goods and services, it evaluates whether the Company is the principal, and reports revenue on a gross basis, or an agent, and reports revenue on a net basis. In this assessment, the Company considers if it obtains 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. Revenue is recorded net of taxes collected from customers which are subsequently remitted to the relevant government authority. The Company does not capitalize any cost associated with contract acquisition because it applies a practical expedient and expenses commissions when incurred as most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less. Sales commissions are included in Sales and marketing expenses in the consolidated statements of operations. The as-invoiced practical expedient is applied when the amount of consideration the Company has a right to invoice corresponds directly with the value to the customer of the entity’s performance completed to date. 75 Table o f Contents Nature of Products and Services Platform segment: The Company generates platform revenue from the sale of digital advertising and related services including the demand-side ad platform and content distribution services such as subscription and transaction revenue shares, media and entertainment promotional spending, the sale of Premium Subscriptions, and sale of branded channel buttons on remote controls. The Company sells digital advertising to advertisers directly or through advertising agencies and to content publishers for their media and entertainment promotions via various campaign tools. Advertising arrangements include video and display advertising delivered through advertising impressions. Advertising arrangements include multiple performance obligations as they contain distinct advertising products or services. For such arrangements, the Company allocates revenue to each distinct performance obligation based on their relative SSP. The Company also generates revenue from customers using its ad platform. For such arrangements, it charges a platform fee, which is a percentage of a customer’s advertising inventory spend during the month, along with data and any add-on features purchased through the platform. The Company recognizes revenue on either a gross or net basis for digital advertising based on its determination as to whether it is acting as the principal in the revenue generation process or as an agent. Where the Company is the principal, it controls the advertising inventory before it is transferred to its customers. This is further supported by the Company being primarily responsible to its customers for the fulfillment and having a level of discretion in establishing pricing. Advertising arrangements comprised of multiple performance obligations are recognized either at a point in time or over time depending on the nature of the distinct performance obligation. The Company’s content distribution revenue sharing arrangements include cash or non-cash consideration. The revenue sharing arrangements generally apply to new subscriptions for accounts that sign up for new services and at the time of a movie rental or purchase. Revenue is recognized on a net basis as the Company is deemed to be the agent between content publishers and end users. Revenue is recognized on a time elapsed basis, by day, as the services are delivered over the contractual distribution term. Non-cash consideration is usually in the form of advertising inventory, the fair value of which is determined based on relevant internal and third-party data. The Company sells monthly subscriptions for premium content on The Roku Channel for varying fees for different content. Revenue from such Premium Subscription fees is recognized on a gross basis over the service period as the Company is deemed to be the principal in the relationship with the end user. The Company obtains control of the content before transferring to the end user and has latitude in establishing pricing. The Company pays fixed fees per subscriber or fixed percentage of revenue share to the providers of premium content on The Roku Channel based on the contractual arrangement and recognizes that in Cost of revenue, platform. The Company sells branded channel buttons on remote controls of streaming devices that provide one-touch access to a publisher’s content. The Company typically receives a fixed fee per button for each unit sold over a defined distribution period. Revenue is recognized on a time elapsed basis, by day, over the distribution term. Devices segment: The Company generates devices revenue from the sale of streaming players, audio products, smart home products and accessories that are sold through retailers and distributors, as well as directly to customers through the Company’s website. Effective as of the fourth quarter of 2022, the Company renamed the segment from player to devices which now also includes revenue from licensing arrangements with service operators and licensed Roku TV partners. The Company sells the majority of its devices in the U.S. through retailers and distributors as well as through the Company’s website. Devices revenue primarily consists of hardware, embedded software, and unspecified upgrades and updates on a when and if-available basis. The hardware and embedded software are considered as one performance obligation and revenue is recognized at a point in time when the control transfers to the customer. Unspecified upgrades and updates are available to customers on a when-and-if available basis. The Company records the allocated value of the unspecified upgrades and updates as deferred revenue and recognizes it as devices revenue ratably on a time elapsed basis over the estimated economic life of the associated products. The Company’s devices revenue includes allowances for sales returns and sales incentives in the estimated transaction price. These estimates are based on historical experience and anticipated performance. Shipping charges billed to customers are included in devices revenue and the related shipping costs are included in Cost of revenue, devices. 76 Table o f Contents The Company licenses the Roku OS, including updates and upgrades, to licensed Roku TV partners and service operators. The licensing revenue is recognized at a point in time, when the Company makes the intellectual property available and the control transfers to the customer. The revenue allocated to unspecified upgrades and updates is recognized on a time elapsed basis, by day, over the service period. Professional services revenue is recognized as services are provided or accepted. Hosting fees are recognized on a time elapsed basis, by day, over the service period. Leases The Company determines if an arrangement contains a lease at its inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and operating lease liability in our consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments. The Company takes into consideration its credit rating and the length of the lease when calculating the incremental borrowing rate. The Company considers the options to extend or terminate the lease in determining the lease term, when it is reasonably certain to exercise one of the options. Fair Value of Financial Instruments The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements. The carrying amounts reported in the consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. The carrying amount of debt approximates fair value due to its variable interest rates. Inventories The Company’s inventories consist primarily of finished goods and are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis. Provisions are made if the cost of the inventories exceeds their net realizable value. The Company evaluates inventory levels and purchase commitments for excess and obsolete products, based on management’s assessment of future demand and market conditions. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of the assets, generally ranging between eighteen months and five years . Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives, which range from one to eleven years . The Company capitalizes costs to develop its internal-use software. Costs that relate to the planning and post-implementation phases of development are expensed as incurred. Costs are capitalized when preliminary efforts are successfully completed, management has authorized and committed to funding the project, and it is probable that the project will be completed and will be used as intended. Costs incurred for enhancements that are expected to result in additional material functionality are capitalized. During the year ended December 31, 2022, the Company did not capitalize any internal-use software costs. During the years ended December 31, 2021, and 2020, the Company capitalized internal-use software development costs of $ 0.5 million and $ 2.2 million, respectively. Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to three years , beginning when the asset is ready for its intended use. During the years ended December 31, 2022, 2021, and 2020, the Company amortized expenses of $ 1.0 million, $ 1.0 million, and $ 0.5 million, respectively. Deferred Revenue The Company’s deferred revenue reflects fees received in advance that will be recognized as revenue over time or as services are rendered. Deferred revenue balances consist of the amount of devices revenue allocated to unspecified upgrades and updates on a when-and-if available basis, and advance payments from advertisers, content publishers, and licensing or services fees received from service operators and TV brands, where performance obligations are not yet fulfilled. Deferred revenue expected to be realized within one year is classified as a current liability and the remaining is recorded as a non-current liability. 77 Table o f Contents Advertising Expenses Advertising expenses are recognized when incurred and are included in Sales and marketing expense in the consolidated statements of operations. The Company incurred advertising expenses of $ 10.0 million, $ 35.2 million, and $ 7.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. Stock-Based Compensation The Company measures compensation expense for all stock-based awards, including restricted stock units and stock options granted to employees, based on the estimated fair value of the award on the date of grant. For restricted stock units, the grant date fair value is based on the closing market price of the Company’s Class A common stock on the date of grant. The fair value of each stock option is estimated using the Black-Scholes option pricing model. The Company accounts for forfeitures as they occur. Stock-based compensation is recognized on a straight-line basis over the requisite vesting period. The Black-Scholes option pricing model used to fair value stock options include the following assumptions: • Fair Value of Our Common Stock . The Company uses the closing market price of its 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. The Company uses the simplified calculation of the expected term, which reflects weighted-average time to vest and the contractual life of the stock options granted, in absence of its own historical exercise data. • Volatility. The expected volatility is derived from an average of the historical volatility of the Company’s Class A common stock price and the stock price volatilities of several peer companies which are similar in size and operational and economic activities. • 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. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. Income Taxes The Company accounts for income taxes using an asset and liability approach. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized. Recently Adopted Accounting Standards On January 1, 2022, the Company adopted the guidance issued in Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires companies to apply Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. The adoption did not have a material impact on the Company’s consolidated financial statements. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . This guidance defers the sunset date for applying the reference rate reform relief in ASC 848 to December 31, 2024. The guidance is effective as of December 21, 2022 through December 31, 2024. The adoption did not have a material impact on the Company’s consolidated financial statements. 78 Table o f Contents 3. REVENUE The Company’s disaggregated revenue is represented by the two reportable segments discussed in Note 18. The contract balances include the following (in thousands): As of December 31, 2022 2021 2020 Accounts receivable, net $ 760,793 $ 752,393 $ 523,852 Contract assets (included in Prepaid expenses and other current assets) 42,617 46,952 7,431 Deferred revenue, current portion 87,678 45,760 55,465 Deferred revenue, non-current portion 28,210 28,726 21,283 Total deferred revenue $ 115,888 $ 74,486 $ 76,748 Accounts receivable are recorded at the amount invoiced, net of an allowance for sales returns, sales incentives, and doubtful accounts. Payment terms can vary by customer and contract. The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets are created when invoicing occurs subsequent to revenue recognition. Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional. The Company’s contract assets are current in nature and are included in Prepaid expenses and other current assets. Contract assets decreased by $ 4.3 million during the year ended December 31, 2022 due to the timing of billing to customers and a slower growth rate in platform revenue. Contract assets increased by $ 39.5 million during the year ended December 31, 2021 primarily due to an increase in the growth of platform revenue combined with the timing of billing which fell into a subsequent period. Deferred revenue reflects consideration invoiced prior to the completion of performance obligations and revenue recognition. Deferred revenue increased by approximately $ 41.4 million during the year ended December 31, 2022 primarily due to the billings in excess of revenue recognized and timing of fulfillment of performance obligations related to revenue arrangements. Deferred revenue decreased by approximately $ 2.3 million during the year ended December 31, 2021 primarily due to the timing of fulfillment of performance obligations related to content arrangements offset by an increase in deferred revenue from advertising arrangements due to growth in the platform business and an increase in the deferral period of devices revenue for its unspecified upgrades. Revenue recognized during the year ended December 31, 2022 from amounts included in the total deferred revenue as of December 31, 2021 was $ 47.6 million. Revenue recognized during the year ended December 31, 2021 from amounts included in the total deferred revenue as of December 31, 2020 was $ 56.2 million. Revenue allocated to remaining performance obligations represents estimated contracted revenue that has not yet been recognized which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Estimated contracted revenue for these remaining performance obligations was $ 997.4 million as of December 31, 2022, of which the Company expects to recognize approximately 56 % over the next 12 months and the remainder thereafter. The Company reversed $ 3.2 million and recognized $ 28.6 million during the years ended December 31, 2022 and 2021, respectively, from performance obligations that were satisfied in previous periods due to the changes in the estimated transaction price of its revenue contracts . The Company did not have any customer that individually accounted for more than 10% of its total net revenue as of December 31, 2022 and 2021. Customer C accounted for 12 % of total net revenue during the year ended December 31, 2020. 79 Table o f Contents 4. BUSINESS COMBINATIONS Nielsen’s Advanced Video Advertising Business On February 28, 2021, the Company entered into an Asset and Stock Purchase Agreement to purchase the Advanced Video Advertising (“AVA”) business from Nielsen Holdings PLC (“Nielsen”). The AVA business consists primarily of video automatic content recognition and dynamic ad insertion technologies. On April 15, 2021, the Company closed the transaction, acquiring from Nielsen the AVA business, consisting of certain assets and liabilities and all of the equity interests in a subsidiary associated with the AVA business (the “Acquisition”). In conjunction with the Acquisition, the Company and Nielsen entered into a strategic commercial arrangement under which the parties will provide certain advertising measurement solutions to each other. The Company acquired Nielsen’s AVA business to accelerate its launch of an end-to-end linear ad replacement solution and to further integrate Nielsen’s ad and content measurement products into the Company’s ad platform. The total purchase consideration for Nielsen’s AVA business was $ 53.4 million, which consisted of (i) $ 38.5 million paid in cash and (ii) $ 21.4 million of non-cash consideration related to obligations to deliver services to Nielsen, offset by (iii) $ 6.5 million of services to be received from Nielsen. The obligations to deliver services to Nielsen were recorded at fair value using the incremental cash flow method. The services to be delivered to Nielsen are recognized within Other income (expense), net in the consolidated statements of operations over the six year service period. The services to be received from Nielsen represent contract terms that the Company entered into for future goods and services that were recorded at fair value using the incremental cash flow method. These services are recognized as Cost of revenue, platform in the consolidated statements of operations over the six year service period. The Company incurred $ 3.9 million in acquisition-related expenses that were recorded in General and administrative expenses in the consolidated statements of operations during the year ended December 31, 2021. The allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed based on estimated fair values was as follows (in thousands): Fair Values Assets acquired Cash and cash equivalents $ 3,057 Prepaid expenses and other current assets 85 Property and equipment, net 584 Intangible assets: Developed technology 11,000 IPR&D technology 7,500 Goodwill 36,790 Operating lease right-of-use assets 1,235 Other non-current assets 1,905 Total assets acquired 62,156 Liabilities assumed Accounts payable and accrued liabilities ( 1,168 ) Operating lease liabilities, non-current portion ( 830 ) Other long-term liabilities ( 6,767 ) Total liabilities assumed ( 8,765 ) Total purchase consideration $ 53,391 The excess of the total consideration over the tangible assets, intangible assets, and liabilities assumed was recorded as goodwill. Goodwill was primarily attributable to expected synergies in advertising offerings and cross-selling opportunities. The majority of the goodwill recorded was deductible for tax purposes. The fair value of the developed technology was estimated using the relief-from-royalty method. The key valuation assumptions included the Company’s estimates of expected future earnings and royalty rate. The Company amortizes the fair value of the developed technology on a straight-line basis over its estimated useful life. The fair value of the in-process research and development (“IPR&D”) technology was estimated using the multi-period-excess-earnings method. The key valuation assumptions included the Company’s estimates of expected future revenue and margin. 80 Table o f Contents The valuation of the intangible assets acquired from Nielsen’s AVA business along with their estimated useful lives, were as follows (in thousands, except years): Estimated Fair Value Estimated Weighted-Average Useful Lives (in years) Developed technology $ 11,000 5.9 IPR&D technology 7,500 Estimated fair value of acquired intangible assets $ 18,500 5.9 This Old House On March 19, 2021, the Company acquired all outstanding shares of TOH Intermediate Holdings, LLC (“This Old House”), a home improvement media business, according to the terms and conditions of the Equity Purchase Agreement. The Company acquired the This Old House business because the Company believed the content aligned with The Roku Channel’s ad-supported growth strategy. The total purchase consideration for This Old House was $ 97.8 million, paid entirely in cash. The Company incurred $ 2.4 million in acquisition-related expenses that were recorded in General and administrative expenses in the consolidated statements of operations during the year ended December 31, 2021. The allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed based on estimated fair values was as follows (in thousands): Fair Values Assets acquired Cash and cash equivalents $ 7 Accounts receivable 5,830 Prepaid expenses and other current assets 7,310 Property and equipment, net 307 Intangible assets: Tradename 20,000 Customer relationships 700 Goodwill 46,671 Operating lease right-of-use assets 5,498 Other non-current assets 23,487 Total assets acquired 109,810 Liabilities assumed Accounts payable and accrued liabilities ( 2,747 ) Deferred revenue, current portion ( 4,146 ) Operating lease liabilities, non-current portion ( 4,262 ) Deferred revenue, non-current portion ( 816 ) Other long-term liabilities ( 28 ) Total liabilities assumed ( 11,999 ) Total purchase consideration $ 97,811 Other non-current assets included $ 22.5 million of content assets acquired. The fair value of the content assets was estimated using the income approach. Amortization expense related to the content assets was recorded on an accelerated basis according to the pattern of monetization. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill. Goodwill was primarily attributable to expected synergies in the advertising offerings as the Company expected to bring more free ad-supported content to the users. The goodwill recorded was deductible for tax purposes. 81 Table o f Contents The fair value of the tradename was estimated using the relief-from-royalty method. The key valuation assumptions included the Company’s estimates of expected future revenue and royalty rate. The Company amortizes the fair value of the tradename on a straight-line basis over its estimated useful life. The valuation of the intangible assets acquired from This Old House along with their estimated useful lives, was as follows (in thousands, except years): Estimated Fair Value Estimated Weighted-Average Useful Lives (in years) Tradename $ 20,000 10.0 Customer relationships 700 4.0 Estimated fair value of acquired intangible assets $ 20,700 9.8 5. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill represents the excess of purchase consideration in a business combination over the fair value of tangible and intangible assets acquired net of the liabilities assumed. All goodwill relates to the platform segment. The following table reflects the changes in the carrying value of goodwill (in thousands): Carrying Value Balance as of December 31, 2020 $ 73,058 Additions This Old House acquisition 46,671 Nielsen AVA business acquisition 36,790 Other immaterial acquisition 5,000 Balance as of December 31, 2021 $ 161,519 Balance as of December 31, 2022 $ 161,519 Goodwill is evaluated for impairment annually. No impairment was recognized during the years ended December 31, 2022, 2021, and 2020. Intangible Assets The following tables summarize the Company’s intangible assets for the periods presented (in thousands, except years): As of December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted-Average Useful Lives (in years) Developed technology $ 73,367 $ ( 37,278 ) $ 36,089 5.9 Customer relationships 14,100 ( 10,920 ) 3,180 4.0 Tradename 20,400 ( 3,966 ) 16,434 9.8 Patents 4,076 ( 898 ) 3,178 14.0 Total Intangible assets $ 111,943 $ ( 53,062 ) $ 58,881 6.7 82 Table o f Contents As of December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted-Average Useful Lives (in years) Developed technology $ 73,367 $ ( 25,350 ) $ 48,017 5.9 Customer relationships 14,100 ( 7,395 ) 6,705 4.0 Tradename 20,400 ( 1,966 ) 18,434 9.8 Patents 4,076 ( 606 ) 3,470 14.0 Intangible assets subject to amortization $ 111,943 $ ( 35,317 ) $ 76,626 6.7 IPR&D technology 7,500 — 7,500 Total Intangible assets $ 119,443 $ ( 35,317 ) $ 84,126 In the fourth quarter of 2022, the Company recognized an impairment charge of $ 7.5 million as part of its restructuring efforts related to the abandonment of future development of certain technology assets. See Note 15 for details. The Company recorded expenses of $ 17.7 million, $ 17.3 million, and $ 14.5 million for amortization of intangible assets during the years ended December 31, 2022, 2021, and 2020, respectively. During the years ended December 31, 2022, 2021, and 2020, the Company recorded amortization of developed technology in Cost of revenue, platform and Research and development expenses. The Company recorded amortization of customer relationships and tradename in Sales and marketing expenses, and recorded amortization of patents in General and administrative expenses in the consolidated statements of operations. As of December 31, 2022, the estimated future amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands): Year Ending December 31, 2023 $ 17,066 2024 14,275 2025 12,571 2026 4,074 2027 2,737 Thereafter 8,158 Total $ 58,881 6. BALANCE SHEET COMPONENTS Accounts Receivable, net : Accounts receivable, net consisted of the following (in thousands): As of December 31, 2022 2021 Accounts receivable, gross $ 800,984 $ 809,220 Less: Allowances Allowance for sales returns 7,417 6,015 Allowance for sales incentives 28,903 48,411 Allowance for doubtful accounts 3,498 2,158 Other allowances 373 243 Total allowances 40,191 56,827 Accounts Receivable, net $ 760,793 $ 752,393 83 Table o f Contents Property and Equipment, net : Property and equipment, net consisted of the following (in thousands): As of December 31, 2022 2021 Computers and equipment $ 45,989 $ 38,473 Leasehold improvements 353,245 182,229 Internal-use software 7,274 7,274 Office equipment and furniture 28,614 20,829 Property and equipment, gross 435,122 248,805 Accumulated depreciation and amortization ( 100,091 ) ( 71,238 ) Property and Equipment, net $ 335,031 $ 177,567 Depreciation and amortization expense, for property and equipment assets, for the years ended December 31, 2022, 2021, and 2020 was $ 31.0 million, $ 25.4 million, and $ 21.7 million, respectively. Accrued Liabilities : Accrued liabilities consisted of the following (in thousands): As of December 31, 2022 2021 Payments due to content publishers $ 201,054 $ 165,894 Accrued cost of revenue 105,347 142,014 Marketing, retail and merchandising costs 163,367 47,428 Operating lease liability, current 54,689 37,116 Content liability, current 88,717 70,462 Other accrued expenses 137,636 86,141 Total Accrued Liabilities $ 750,810 $ 549,055 Deferred Revenue : Deferred revenue consisted of the following (in thousands): As of December 31, 2022 2021 Platform, current $ 59,276 $ 17,144 Devices, current 28,402 28,616 Total deferred revenue, current 87,678 45,760 Platform, non-current 969 1,066 Devices, non-current 27,241 27,660 Total deferred revenue, non-current 28,210 28,726 Total Deferred Revenue $ 115,888 $ 74,486 Other Long-term Liabilities : Other Long-term liabilities consisted of the following (in thousands): As of December 31, 2022 2021 Content liability, non-current $ 39,587 $ 51,211 Other long-term liabilities 30,324 31,274 Total Other long-term liabilities $ 69,911 $ 82,485 84 Table o f Contents 7. CONTENT ASSETS Content assets consisted of the following (in thousands): As of December 31, 2022 2021 Licensed content, net and advances $ 243,226 $ 218,456 Produced content: Released, less amortization 42,605 20,030 Completed, not released 3,537 881 In production 42,904 3,512 Total produced content, net 89,046 24,423 Total content assets, net and advances $ 332,272 $ 242,879 Current portion $ 39,506 $ 19,166 Non-current portion $ 292,766 $ 223,713 Amortization of content assets is included in Cost of revenue, platform in the consolidated statements of operations and is as follows (in thousands): Years Ended December 31, 2022 2021 2020 Licensed content $ 216,393 $ 84,133 $ 22,392 Produced content 17,962 11,437 — Total amortization costs $ 234,355 $ 95,570 $ 22,392 The following table reflects the expected amortization expense of released produced and licensed content assets, net for the next three years (in thousands): Years Ended December 31, 2023 2024 2025 Licensed content $ 109,075 $ 50,655 $ 29,770 Produced content 16,185 8,403 8,035 Total expected amortization costs $ 125,260 $ 59,058 $ 37,805 8. STRATEGIC INVESTMENT In June 2022, the Company agreed to provide financing of up to $ 60.0 million in the aggregate to a counterparty with whom the Company has a commercial relationship, of which $ 40.0 million was advanced in the form of convertible promissory notes (the “Strategic Investment”) and is recognized in Other non-current assets on the consolidated balance sheets. The Strategic Investment accrues interest at 5 % per annum and has a maturity date of June 15, 2025, or is due upon a redemption event or in the event of a default. The Strategic Investment contains certain redemption features that meet the definition of embedded derivatives and require bifurcation. The Company elected to apply the fair value option and account for the hybrid instrument containing the host contract and the embedded derivatives at fair value as a single instrument, with any subsequent changes in fair value included in Other income (expense), net in the consolidated statements of operations. See Note 9 for additional details on the fair value of the Strategic Investment. 85 Table o f Contents 9. FAIR VALUE DISCLOSURE The Company’s financial assets measured at fair value on a recurring basis are as follows (in thousands): As of December 31, 2022 As of December 31, 2021 Fair Value Level 1 Level 3 Fair Value Level 1 Level 3 Assets: Cash and cash equivalents: Cash $ 1,353,547 $ 1,353,547 $ — $ 1,130,172 $ 1,130,172 $ — Money market funds 608,409 608,409 — 1,015,871 1,015,871 — Restricted cash, non-current — — — 1,627 1,627 — Strategic Investment — — 39,468 — — — Total assets measured and recorded at fair value $ 1,961,956 $ 1,961,956 $ 39,468 $ 2,147,670 $ 2,147,670 $ — The following table reflects the changes in the fair value of the Company’s Level 3 financial assets (in thousands): Fair Value Balance, December 31, 2021 $ — Purchase of Strategic Investment 40,000 Change in estimated fair value of Strategic Investment ( 532 ) Balance, December 31, 2022 $ 39,468 Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value, and utilizes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows: Level 1 —Quoted prices in active markets for identical assets or liabilities. Financial assets and liabilities measured using Level 1 inputs include cash equivalents including restricted cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities. The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company measured money market funds of $ 608.4 million and $ 1,015.9 million as cash equivalents as of December 31, 2022 and 2021, respectively, using Level 1 inputs. Level 2 —Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means. The Company did not have any Level 2 instruments as of December 31, 2022 and 2021. Level 3 —Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As of December 31, 2022, the Company measured the Strategic Investment using Level 3 inputs. The fair value of the Strategic Investment on the date of purchase was determined to be equal to its principal amount. The Company recorded an unrealized loss of $ 0.5 million in Other income (expense), net related to the adjustment to fair value of the Strategic Investment for the year ended December 31, 2022. The Company did not have any Level 3 financial assets or liabilities as of December 31, 2021. 86 Table o f Contents The Company classified the Strategic Investment as Level 3 due to the lack of relevant observable market data over fair value inputs. The fair value of the Strategic Investment was estimated using a scenario-based probability weighted discounted cash flow model. Significant assumptions include the discount rate, and the timing and probability weighting of the various redemption scenarios that impact the settlement of the Strategic Investment. Assets and liabilities that are measured at fair value on a non-recurring basis Non-financial assets such as goodwill, intangible assets, property and equipment, operating lease right-of-use assets, and content assets are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when impairment is recognized. 10. LEASES The Company has entered into operating leases primarily for office real estate. The leases have remaining terms ranging from 1 year to 11 years and may include options to extend or terminate the lease. The depreciable life of ROU assets is limited by the expected lease term. The components of lease expense are as follows (in thousands): Years Ended December 31, 2022 2021 2020 Operating lease cost $ 76,359 $ 46,410 $ 42,127 Variable lease cost 18,991 15,080 12,116 Total operating lease cost $ 95,350 $ 61,490 $ 54,243 Supplemental cash flow information related to leases is as follows (in thousands): Years Ended December 31, 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 56,370 $ 51,657 $ 30,664 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 231,728 $ 110,845 $ 12,031 Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate): As of December 31, 2022 2021 Operating lease right-of-use assets $ 521,695 $ 345,660 Operating lease liability, current (included in Accrued liabilities) 54,689 37,116 Operating lease liability, non-current 584,651 394,724 Total operating lease liability $ 639,340 $ 431,840 Weighted-average remaining term for operating leases (in years) 8.62 8.38 Weighted-average discount rate for operating leases 3.80 % 3.98 % 87 Table o f Contents Future lease payments under operating leases as of December 31, 2022 are as follows (in thousands): Year Ending December 31, Operating Leases 2023 $ 73,341 2024 86,301 2025 93,927 2026 94,513 2027 92,772 Thereafter 342,432 Total future lease payments 783,286 Less: imputed interest ( 119,527 ) Less: expected tenant improvement allowance ( 24,419 ) Total $ 639,340 As of December 31, 2022, the Company’s commitment relating to operating leases that have not yet commenced was $ 36.2 million. These operating leases will commence starting in fiscal year 2023 with lease terms of approximately 4 years to 11 years . 11. DEBT The Company’s outstanding debt as of December 31, 2022 and 2021 is as follows (in thousands): As of December 31, 2022 2021 Amount Effective Interest Rate Amount Effective Interest Rate Term Loan A Facility $ 80,000 4.4 % $ 90,000 2.0 % Less: Debt issuance costs ( 15 ) ( 132 ) Net carrying amount of debt $ 79,985 $ 89,868 The carrying amount of debt approximates fair value due to its variable interest rates. The interest expense for the years ended December 31, 2022 and 2021 relating to the Credit Agreement is $ 3.6 million and $ 2.2 million, respectively. Senior Secured Term Loan A and Revolving Credit Facilities On February 19, 2019, the Company 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 the satisfaction of certain financial and other conditions, in the amount of up to (v) $ 50.0 million, plus (w) 1.0 x of the Company’s EBITDA for the most recently completed four fiscal quarter period, plus (x) an additional amount at the Company’s discretion, so long as, on a pro forma basis at the time of incurrence, the Company’s 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 November 18, 2019, the Company borrowed the Term Loan A facility in the aggregate principal amount of $ 100.0 million. In March 2020, the Company borrowed the available balance of $ 69.3 million from the Revolving Credit Facility. For both borrowings, the Company elected an interest rate equal to the adjusted one-month LIBOR rate plus an applicable margin of 1.75 % based on the Company’s secured leverage ratio. In May 2020, the Company repaid the outstanding balance on the Revolving Credit Facility. 88 Table o f Contents Loans under the Term Loan A Facility amortize in equal quarterly installments beginning on March 31, 2020, in an aggregate annual amount equal to (i) on or prior to December 31, 2021, 1.25 % of the drawn principal amount of the Term Loan Facility or $ 1.25 million and (ii) thereafter, 2.50 % of the drawn principal amount of the Term Loan Facility or $ 2.5 million, with the remaining balance payable on the maturity date of the Term Loan A Facility in February 2023. The Revolving Credit Facility may be borrowed, repaid, and reborrowed until the fourth anniversary of the Closing Date in February 2023, at which time all outstanding balances of the Revolving Credit Facility are due to be repaid. The Company had outstanding letters of credit against the Revolving Credit Facility of $ 37.7 million and $ 38.0 million as of December 31, 2022 and 2021, respectively. The Company’s obligations under the Credit Agreement are secured by substantially all of its assets. In the future, certain of its direct and indirect subsidiaries may be required to guarantee the Credit Agreement. The Company may prepay, and in certain circumstances would be required to prepay, loans under the Credit Agreement without payment of a premium. The Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires the Company to maintain a certain adjusted quick ratio of at least 1.00 to 1.00, and customary events of default. As of December 31, 2022, the Company was in compliance with all of the covenants of the Credit Agreement . 12. STOCKHOLDERS’ EQUITY Preferred Stock The Company has 10 million shares of undesignated preferred stock authorized but not issued with rights and preferences determined by the Company’s Board of Directors at the time of issuance of such shares. As of December 31, 2022 and 2021, there were no shares of preferred stock issued and outstanding. Common Stock The Company has two classes of authorized common stock, Class A common stock and Class B common stock. Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders and holders of Class B common stock are entitled to ten votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and are generally automatically converted into shares of the Company’s Class A common stock upon sale or transfer. Shares issued in connection with exercises of stock options, vesting of restricted stock units, or shares purchased under the employee stock purchase plan are generally automatically converted into shares of the Company’s Class A common stock. At-the-Market Offering On March 2, 2021, the Company entered into an Equity Distribution Agreement with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., and Evercore Group L.L.C., as its sales agents, pursuant to which the Company could offer and sell from time-to-time shares of its Class A common stock for aggregate gross proceeds of up to $ 1,000.0 million. In March 2021, the Company 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. Common Stock Reserved For Issuance As of December 31, 2022, the Company’s common stock reserved for issuance in the future is as follows (in thousands): Common stock awards granted under equity incentive plans 14,384 Common stock awards available for issuance under the 2017 Employee Stock Purchase Plan * 5,089 Common stock awards available for issuance under the 2017 Equity Incentive Plan 23,954 Total reserved shares of common stock 43,427 * The Company has not issued any common stock pursuant to the 2017 Employee Stock Purchase Plan. 89 Table o f Contents Equity Incentive Plans The Company has two equity incentive plans, the 2008 Equity Incentive Plan (the “2008 Plan”) and the 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan became effective September 2017 in connection with the Company’s initial public offering (“IPO”). No additional equity grants have been made pursuant to the 2008 Plan subsequent to the IPO. The 2017 Plan provides for the grant of incentive stock options to the Company’s employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity compensation to the Company’s employees, directors and consultants. Restricted stock units granted under the 2017 Plan are subject to continuous service. Stock options granted under the 2017 Plan generally are granted at a price per share equivalent to the fair market value on the date of grant. Recipients of option grants who possess more than 10 % of the combined voting power of the Company are subject to certain limitations, and incentive stock options granted to such recipients are at a price no less than 110 % of the fair market value at the date of grant. Restricted Stock Units Restricted stock unit activity for the year ended December 31, 2022 is as follows (in thousands, except per share data): Number of Shares Weighted-Average Grant Date Fair Value Per Share Balance, December 31, 2021 3,286 $ 169.76 Awarded 8,808 104.09 Released ( 2,429 ) 116.38 Forfeited ( 1,088 ) 142.84 Balance, December 31, 2022 - Outstanding 8,577 $ 120.82 The weighted-average grant date fair value of restricted stock units granted during the years ended December 31, 2022, 2021, and 2020 was $ 916.8 million, $ 342.6 million, and $ 210.1 million, respectively. The fair value of restricted stock units that vested during the years ended December 31, 2022, 2021, and 2020 was $ 282.6 million, $ 135.6 million, and $ 83.7 million, respectively. The unrecognized stock-based compensation expense related to restricted stock units awarded to employees as of December 31, 2022 was $ 898.6 million, which the Company expects to recognize over a weighted-average period of approximately 2.84 years. Stock Options The following table summarizes the Company’s stock option activities under the 2008 Plan and 2017 Plan (in thousands, except years and per share data): Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Weighted-Average Grant Date Fair Value Per Share Aggregate Intrinsic Value Balance, December 31, 2021 6,174 $ 51.87 5.8 — Granted 2,215 63.66 — $ 36.66 Exercised ( 2,461 ) 7.46 — — Forfeited and expired ( 121 ) 167.00 — — Balance, December 31, 2022 - Outstanding 5,807 $ 72.79 7.1 — $ 51,630 Balance, December 31, 2022- Exercisable 2,831 $ 39.06 5.0 — $ 51,630 90 Table o f Contents The weighted-average grant date fair value per share of options granted during the years ended December 31, 2022, 2021, and 2020 was $ 36.66 , $ 139.76 , and $ 54.39 , respectively. The intrinsic value for stock options exercised in the years ended December 31, 2022, 2021, and 2020 was $ 210.0 million, $ 997.6 million, and $ 470.8 million, respectively. Intrinsic value represents the difference between the fair values of the Company’s common stock and the stock options’ exercise price on the date of grant. As of December 31, 2022, the Company had $ 107.8 million of unrecognized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 2.6 years. Stock-based Compensation The Company measures the cost of employee services received in exchange for an equity award based on the grant date fair value of the award. Stock options granted to employees generally vest over one to four years have a term of ten years . Restricted stock units generally vest over four years . No stock-based compensation was capitalized for the years ended December 31, 2022 and 2020. The amount of stock-based compensation capitalized as part of internal-use software for the year ended December 31, 2021 was not material. The following table presents total stock-based compensation expense for the years ended December 31, 2022, 2021, and 2020 (in thousands): Years Ended December 31, 2022 2021 2020 Cost of revenue, platform $ 1,229 $ 827 $ 847 Cost of revenue, device 2,440 2,035 1,407 Research and development 147,653 77,770 58,412 Sales and marketing 123,946 63,503 42,846 General and administrative 84,663 43,397 30,564 Total stock-based compensation $ 359,931 $ 187,532 $ 134,076 The fair value of stock options granted under the 2008 Plan and 2017 Plan is estimated on the grant date using the Black-Scholes option-valuation model. The assumptions used to value stock options granted during the years ended December 31, 2022, 2021, and 2020 are as follows: Years Ended December 31, 2022 2021 2020 Expected term (in years) 5.0 - 6.8 5.0 - 6.8 5.0 - 6.7 Risk-free interest rate 1.37 - 4.33 % 0.36 - 1.20 % 0.22 - 1.67 % Expected volatility 57 - 61 % 38 - 39 % 36 - 39 % Dividend rate — — — 13. COMMITMENTS AND CONTINGENCIES Manufacturing Purchase Commitments The Company has various manufacturing contracts with vendors in the conduct of the normal course of its business. In order to manage future demand for its products, the Company enters into agreements with manufacturers and suppliers to procure inventory based upon certain criteria and timing. Some of these commitments are non-cancelable. As of December 31, 2022, the Company had $ 169.7 million of non-cancelable purchase commitments for inventory. Content Commitments The Company enters into contracts with content publishers to license and produce content for streaming. When a title becomes available, the Company records a content asset and liability on the consolidated balance sheets. Certain licensing agreements, such as film output deals, include the obligation to license rights for unknown future titles for which the ultimate quantity and/or fees are not determinable as of the reporting date. The Company does not include any estimated obligation for these future titles beyond the known minimum amount. The unknown obligations could be material. 91 Table o f Contents As of December 31, 2022, the Company’s total obligation for licensed and produced content is $ 393.1 million, of which the Company recorded $ 94.6 million in Current liabilities and $ 39.6 million in Other long-term liabilities in the consolidated balance sheets. The remaining $ 258.9 million is not yet recognized on the consolidated balance sheets as the content does not meet the criteria for asset recognition. The expected timing of payments for these content obligations are as follows (in thousands): Year Ending December 31, 2023 $ 230,756 2024 111,158 2025 35,394 2026 10,532 2027 1,838 Thereafter 3,429 Total content liabilities $ 393,107 The Company also licenses content under arrangements where the payments are variable and based on the revenue earned by the Company. Since those amounts cannot be determined as of December 31, 2022, they are not included in the obligations above. Letters of Credit As of December 31, 2022 and 2021, the Company had irrevocable letters of credit outstanding in the amount of $ 37.7 million and $ 38.0 million, respectively, related to facilities leases. The letters of credit have various expiration dates through 2030. Contingencies The Company accrues for loss contingencies, including liabilities for intellectual property licensing claims, when it believes such losses are probable and reasonably estimable. These contingencies are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events. The resolution of these contingencies and of other legal proceedings can be, however, inherently unpredictable and subject to significant uncertainties. From time to time, the Company is subject to legal proceedings, claims, and investigations in the ordinary course of business, including claims relating to employee relations, business practices, and patent infringement. The Company is involved in litigation matters not listed herein. Although the results of these proceedings, claims, and investigations cannot be predicted with certainty, the Company does not believe that the final outcome of any matters that it is currently involved in are reasonably likely to have a material adverse effect on its business, financial condition, or results of operations. During the year ended December 31, 2022 and 2020, the Company did not have any loss contingencies that were material. During the year ended December 31, 2021 the Company recorded expenses of $ 4.8 million in Cost of revenue, device, $ 1.8 million in Cost of revenue, platform, and $ 3.4 million in General and administrative expenses for claims related to patent infringement. Indemnification In the ordinary course of business, the Company has entered into contractual arrangements which provide indemnification provisions of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. The Company’s obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the consolidated financial statements. 92 Table o f Contents 14. INCOME TAXES The components of income (loss) before income taxes consist of the following (in thousands): Years Ended December 31, 2022 2021 2020 United States $ ( 486,886 ) $ 240,560 $ ( 21,107 ) Foreign ( 5,397 ) ( 3,973 ) 2,655 Net income (loss) before income taxes $ ( 492,283 ) $ 236,587 $ ( 18,452 ) The income tax expense (benefit) consisted of the following (in thousands): Years Ended December 31, 2022 2021 2020 Current: Federal $ 694 $ — $ ( 219 ) State 2,444 589 620 Foreign 2,002 490 743 5,140 1,079 1,144 Deferred: Federal 448 193 — State 220 256 — Foreign ( 86 ) ( 7,326 ) ( 2,089 ) 582 ( 6,877 ) ( 2,089 ) Total $ 5,722 $ ( 5,798 ) $ ( 945 ) The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate: Years Ended December 31, 2022 2021 2020 U.S. federal income tax at statutory rate 21.0 % 21.0 % 21.0 % U.S. state and local income taxes ( 0.5 ) 0.2 ( 3.2 ) Change in valuation allowance ( 39.1 ) 140.0 ( 698.4 ) Federal research and development tax credit 14.6 ( 30.7 ) 102.9 Stock-based compensation 4.0 ( 114.3 ) 577.8 Discrete tax benefit due to intellectual property transfer — ( 19.1 ) — Meals and entertainment ( 0.1 ) 0.1 ( 1.6 ) Foreign rate differential 0.2 0.1 — Section 162(m) limitation ( 0.5 ) 1.1 ( 7.2 ) State apportionment change 0.1 — 4.4 Tax rate change — ( 0.7 ) — Provision to return true-up ( 0.1 ) ( 0.1 ) 9.4 Other ( 0.8 ) ( 0.1 ) 0.1 Effective tax rate ( 1.2 ) % ( 2.5 ) % 5.2 % 93 Table o f Contents Significant components of the Company’s deferred income tax assets and liabilities consist of the following (in thousands): As of December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 517,787 $ 563,173 Reserves and accruals 20,068 20,969 Research and development credits 230,586 166,940 Operating lease liabilities 153,145 107,228 Stock-based compensation 50,661 36,350 Depreciation and amortization 41,377 40,583 Section 174 capitalization 165,219 — Other 286 — Total deferred tax assets 1,179,129 935,243 Deferred tax liabilities: Operating lease right-of-use assets ( 128,517 ) ( 85,713 ) Total deferred tax liabilities ( 128,517 ) ( 85,713 ) Valuation allowance ( 1,040,341 ) ( 838,949 ) Net deferred tax assets $ 10,271 $ 10,581 Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct research and development expenses for tax purposes in the period the expenses were incurred. As a result, the Company has recorded additional U.S. income tax expense of $ 3.0 million for the year ended December 31, 2022. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized through future operations. As a result of the Company’s analysis of all available objective evidence, both positive and negative, as of December 31, 2022, management believes it is more likely than not that the U.S. and Netherlands deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its U.S. and Netherlands deferred tax assets. The Company’s U.S. federal and state valuation allowance increased by $ 199.2 million and $ 261.8 million during the years ended December 31, 2022 and 2021, respectively. The change in the valuation allowance, during the year ended December 31, 2022, is primarily attributable to an increase in deferred tax assets generated through capitalization of section 174 research and development expenses for U.S. federal and conforming state purposes. The change in the valuation allowance during the year ended December 31, 2021 is primarily attributable to an increase in domestic net operating loss carryforwards primarily due to stock-based compensation expense, and an increase of approximately $ 46.2 million in deferred tax assets that are not realizable, related to the intellectual property transfer completed during 2021, giving rise to foreign amortizable assets. For federal and state income tax reporting purposes, respective net operating loss carryforwards of $ 1,959.1 million and $ 1,677.7 million are available to reduce future taxable income, if any. These net operating loss carryforwards will begin to expire in 2033 for federal and certain state net operating losses have expired in 2022. For Brazil, Denmark, Netherlands, and U.K. income tax reporting purposes, the net operating loss carryforwards of $ 8.0 million, $ 1.6 million, $ 23.5 million, and $ 26.2 million, respectively, are available to reduce future taxable income, if any, in those countries. Brazil, Denmark, and U.K. net operating losses can be carried forward indefinitely. Netherlands net operating losses can be carried back one year and carried forward indefinitely. As of December 31, 2022, the Company has research and development tax credit carryforwards of $ 188.7 million and $ 134.7 million for federal and state income tax purposes, respectively. If not utilized, the federal and state carryforwards will begin to expire in 2028 and 2035, respectively. The total amount of unrecognized tax benefits as of December 31, 2022 is $ 88.0 million, of which $ 71.3 million is composed of research and development credits and $ 16.7 million is related to international activities. 94 Table o f Contents A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands): As of December 31, 2022 2021 Unrecognized tax benefits at beginning of year $ 66,150 $ 29,175 Gross increase for tax positions of current year 22,888 36,198 Gross decrease due to statute expiration ( 317 ) ( 330 ) Gross increase for tax positions of prior years 676 1,107 Gross decrease for tax positions of prior years ( 1,185 ) — Decrease relating settlements with taxing authorities ( 184 ) — Unrecognized tax benefits balance at end of year $ 88,028 $ 66,150 As of December 31, 2022, $ 5.3 million of the Company's gross unrecognized tax benefits, if recognized, would affect the effective tax rate and, $ 82.7 million would result in an adjustment to deferred tax assets with corresponding adjustments to the valuation allowance. We do not expect our gross unrecognized tax benefits to change significantly within the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. The Company recorded $ 0.8 million and $ 0.3 million of accrued interest and penalties related to uncertain tax positions as of December 31, 2022 and December 31, 2021, respectively. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All tax years remain subject to examination by federal and state authorities. These audits include questioning the timing and amount of deductions; the nexus of income among various tax jurisdictions; and compliance with federal, state, and local tax laws. The Company will continue to indefinitely reinvest earnings from its foreign subsidiaries, which are not significant. While federal income tax expense has been recognized as a result of the Tax Cuts and Jobs Act of 2017, the Company has not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss. It is not practicable for the Company to determine the amount of unrecognized tax expense on these reinvested international earnings. 15. RESTRUCTURING CHARGES In November 2022, the Company approved a plan to reduce its operating expense growth rate due to economic conditions. The Company eliminated employee positions in the United States and internationally, and also abandoned future development for certain technology assets. Accordingly, the Company recorded employee termination expenses consisting primarily of severance payments, notice pay (where applicable), employee benefits contributions, payroll taxes and related costs, and an impairment charge related to the abandoned technology assets. The restructuring charges are recorded as follows (in thousands): Year Ended December 31, 2022 Employee Terminations Impairment Charge Total Research and development $ 12,092 $ 7,500 $ 19,592 Sales and marketing 10,904 — 10,904 General and administrative 7,644 — 7,644 Total restructuring charges $ 30,640 $ 7,500 $ 38,140 A reconciliation of the beginning and ending balance of employee termination restructuring charges, which are included in Accrued liabilities in the consolidated balance sheets, is as follows (in thousands): Employee Terminations Balance as of December 31, 2021 $ — Employee termination restructuring charges incurred 30,640 Cash payments ( 8,547 ) Balance as of December 31, 2022 $ 22,093 The Company expects the plan to be substantially complete by the end of the first quarter in fiscal 2023. 95 Table o f Contents 16. RETIREMENT PLANS The Company maintains a 401(k) tax deferred saving plan (the “Savings Plan”) for the benefit of qualified employees. Qualified employees may elect to make contributions to the Savings Plan on a biweekly basis, subject to certain limitations. The Company may make contributions to the Savings Plan at the discretion of the Board of Directors. No contributions were made for the years ended December 31, 2022, 2021, and 2020. The Company has a defined contribution plan in the U.K. for its U.K.-based employees. The Company contributed $ 2.3 million, $ 1.3 million, and $ 0.7 million to the plan for the years ended December 31, 2022, 2021, and 2020, respectively. 17. NET INCOME (LOSS) PER SHARE The Company’s basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding for the period. The Company uses the two-class method to calculate net income (loss) per share. Except with respect to certain voting, conversion, and transfer rights and as otherwise expressly provided in the Company’s amended and restated certificate of incorporation or required by applicable law, shares of the Company’s Class A common stock and Class B common stock have the same rights and privileges and rank equally, share ratably, and are identical in all respects as to all matters. Accordingly, basic and diluted net income (loss) per share are the same for both classes. For purposes of the calculation of diluted net income (loss) per share, options to purchase common stock and restricted stock units are considered common stock equivalents. Dilutive shares of common stock are determined by applying the treasury stock method. The dilutive shares are excluded from the calculation of diluted net loss per share in the period of net loss, as their effect is antidilutive. The following table presents the calculation of basic and diluted net income (loss) per share as follows (in thousands, except per share data): Years Ended December 31, 2022 2021 2020 Numerator: Net income (loss) $ ( 498,005 ) $ 242,385 $ ( 17,507 ) Denominator: Basic net income (loss) per share: Weighted-average common shares outstanding — basic 137,668 132,710 123,978 Net income (loss) per share — basic $ ( 3.62 ) $ 1.83 $ ( 0.14 ) Diluted net income (loss) per share: Weighted-average common shares outstanding — basic 137,668 132,710 123,978 Effect of potentially dilutive securities: Restricted stock units — 2,744 — Stock options — 6,214 — Weighted-average common shares outstanding — diluted 137,668 141,668 123,978 Net income (loss) per share — diluted $ ( 3.62 ) $ 1.71 $ ( 0.14 ) Common stock equivalents excluded from the calculation of diluted net income (loss) per share because of their anti-dilutive effect were 14.4 million, 1.1 million and 13.1 million units of equity awards to purchase common stock granted under our equity plans for the years ended December 31, 2022, 2021, and 2020, respectively. 96 Table o f Contents 18. SEGMENT INFORMATION An operating segment is defined as a component of an entity for which discrete financial information is available that is evaluated regularly by the CODM for purposes of allocating resources and evaluating financial performance. The Company’s CODM is its Chief Executive Officer, and the CODM evaluates performance and makes decisions about allocating resources to its operating segments based on financial information presented on a consolidated basis and on revenue and gross profit for each operating segment. The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company’s notes to its consolidated financial statements. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance. The Company reports its financial results consistent with the manner in which financial information is viewed by management for decision-making purposes. The Company does not manage operating expenses such as research and development, sales and marketing and general and administrative expenses at the segment level. The Company does not allocate property and equipment or any other assets or capital expenditures to reportable segments. Effective as of the fourth quarter of fiscal 2022, the Company reorganized reportable segments to better align with management’s reporting of information reviewed by the CODM for each segment. The Company’s segment and related financial information has been recast to reflect the following changes; the Company renamed the player segment to the devices segment which now includes licensing arrangements with service operators and licensed Roku TV partners in addition to sales of streaming players, audio products and smart home products. All financial information, current and historical, has been recast based on the reorganized segments. Updated descriptions of the Company’s two reportable segments are as follows: Platform The platform segment generates revenue from the sale of digital advertising and related services including the demand-side platform and 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. Devices The devices segment generates revenue from the sale of streaming players, audio products, smart home products and accessories that are sold through retailers and distributors, as well as directly to customers through the Company’s website. In addition, revenue from licensing arrangements with service operators and licensed Roku TV partners is now included in the devices segment. Customers accounting for 10% or more of segment revenue, net, were as follows: Years Ended December 31, 2022 2021 2020 Platform segment revenue Customer H * 10 % 14 % Devices segment revenue Customer A * * 10 % Customer B 21 % 22 % 17 % Customer C 38 % 35 % 39 % * Less than 10% Revenue in international markets was less than 10% in each of the periods presented. Long-lived assets, net The following table presents long-lived assets, net, which consist primarily of property and equipment and operating lease right-of-use assets, by geographic area (in thousands): As of December 31, 2022 2021 United States $ 686,902 $ 442,012 United Kingdom 127,538 59,168 Other countries 42,286 22,047 Total $ 856,726 $ 523,227 97 Table o f Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.