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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 203 added, 315 removed, 221 unchanged (70% of the section changed)

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

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

This discussion contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those discussed below.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed above in the section entitled “Risk Factors.” Our fiscal year ends on December 31.

Roku is the leading TV streaming platform in the United States based on hours streamed.

We pioneered streaming to the TV and were founded on the belief that someday all TV content would be streamed.

Over the last year as TV streaming has become mainstream, many of the biggest names in media and TV programming embraced the transition to streaming resulting in the launch of new TV streaming services, growing investment in original content that is exclusive to streaming, and more ad-supported TV viewing options.

We are capitalizing on this economic opportunity by connecting our users to the streaming content they love, enabling content publishers to build and monetize large audiences, and providing advertisers with unique capabilities to reach and engage consumers.

As of December 31, 2019, we had 36.9 million active accounts, an increase of 36% from the prior year, and our users streamed 40.3 billion hours of content during 2019, an increase of 68% year-over-year.

Our business model is driven by three core activities.

We focus on increasing the number of active accounts on our streaming platform, increasing user engagement and growing the hours of content streamed, and growing our revenue and gross profit by monetizing user activity on our platform.

To increase the number of active accounts on our platform, we sell stand-alone streaming devices, we partner with TV brand partners who license the Roku OS to manufacture and sell Roku TV models, and we also license the Roku OS to certain service operators.

During 2019, t he fastest growing source of new accounts was licensing arrangements with our Roku TV brand partners and other service operators, which collectively accounted for 56% of new accounts, up from 50% in 2018.

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

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

Risk Factors and the Note Regarding Forward-Looking Statements.

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

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

We operate in two revenue segments:

the platform segment and the player segment.

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

We measure our platform monetization through average revenue per user (“ARPU”), which we believe represents the inherent value of our business.

We generated revenue of $1,128.9 million during the year ended December 31, 2019, up by 52% year-over-year.

During the year ended December 31, 2019, we generated a gross profit of $495.2 million, which is up 49% from the year ended December 31, 2018.

We believe we have a significant opportunity to continue to grow platform revenue, and, as we further monetize streaming hours, we believe we will increase ARPU.

ARPU was $23.14 for the year ended December 31, 2019 as compared to $17.95 for the year ended December 31, 2018, an increase of 29%.

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

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

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

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

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

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

COVID-19 Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Key Performance Metrics

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

Streaming Hours

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

Hours Streamed

We believe the number of streaming hours on our platform is an effective measure of user engagement and that the growth in the number of hours of content streamed across our platform reflects our success in addressing the growing user demand for TV streaming.

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We report streaming hours on a calendar basis.

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

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

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

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

During the third quarter of 2019, we began rolling out a new Roku OS feature that is designed to identify when content has been continuously streaming on a channel for an extended period of time without user interaction.

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

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

We believe that implementing this new feature across the Roku platform will benefit us, our customers, channel partners and advertisers.

Some of our leading channel partners, including Netflix, have already implemented similar features within their channels.

“Are you still watching” supplements these channel features.

We began rolling out to our entire installed base during 2019 and completed the rollout in the first quarter of 2020.

While we expect continued robust growth in our aggregate streaming hours as we grow active accounts and user engagement, we believe our year-over-year growth rates of streaming hours reported in 2020 are likely to be lower than the year-over-year growth rates we reported in 2019.

We do not expect the rollout of this feature to have a material impact on our future financial performance.

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

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

their channels.

This Roku OS feature supplements these channel features.

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

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

Note About Our Streaming Hours Adjustments

To calculate and report our streaming hours, we utilize data from event logs generated by the firmware running on the Roku devices that are recorded in a central database.

The event information (play, pause, stop, time counts, etc.) is generated by the firmware running on the Roku streaming devices, and event data is transmitted to our central database at regular intervals when a device is connected to the internet.

Pause time is not intended to be included in streaming hours.

During the second quarter of 2020 we discovered that some pause time was inadvertently included in the streaming hours information recorded in our central database.

Upon discovering these errors in the log data, we promptly reviewed and analyzed the issue utilizing our firmware, data engineering and core analytics teams.

We concluded that certain past Roku OS releases inadvertently caused the logging errors.

The error rates varied over time and across different types of devices and firmware versions.

As a result, we reported higher streaming hours and streaming hours growth rates for the affected periods than we would have if all pause time had been excluded from streaming hours as we had intended.

Neither these logging errors, nor the resulting adjustments that we made to our streaming hours calculations, has had any impact on our financial results, and do not require us to revise any of our previously reported key operating metrics other than streaming hours.

The affected log data was for the periods from February 2016 to August 2020.

After adjusting for logging errors, we estimate that our streaming hours were, on average, approximately 0.5% lower than previously reported for the period January 2017 through September 2018, and approximately 5.8% lower for the period October 2018 through March 2020.

By the end of August 2020, we fully deployed a software update that addressed the root cause of the pause time logging errors and prevented them from continuing.

The roll out of the “Are you still watching” feature had no impact on the adjustments we made to our streaming hours calculations.

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

we believe that the growth in the number of hours of content streamed across our platform reflects our success in addressing the growing user demand for TV streaming.

After adjusting our streaming hours as discussed above, our estimated year-over-year streaming hour growth rates for fiscal year 2018 versus fiscal year 2017, fiscal year 2019 versus fiscal year 2018 and the first quarter of 2020 versus the first quarter of 2019 were 60.5%, 59.3% and 46.8%, respectively.

The estimated year-over-year streaming hour growth rate for the second quarter of 2020 versus the second quarter of 2019 was 65%.

The following table presents the estimated impacts on streaming hours (in billions) for periods from January 1, 2017 through March 31, 2020 and streaming hours growth rates on a year-over-year (“YoY”) basis by quarter for periods from January 1, 2018 through March 31, 2020 and annually for fiscal year 2018 and 2019.

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

Published SHs

Published YoY

Published SHs

Published YoY

Average Revenue per User

We measure our platform monetization progress with ARPU.

We measure our platform monetization progress with ARPU, which we believe represents the inherent value of our business.

We define ARPU as our platform revenue for the trailing four quarters divided by the average of the number of active accounts at the end of the current period and the end of the corresponding period in the prior year.

ARPU measures the rate at which we are monetizing our active account base and the progress of our platform business.

Our average revenue per user was $23.14 and $17.95 as of December 31, 2019 and 2018, respectively.

ARPU was $28.76 as of December 31, 2020 as compared to $23.14 as of December 31, 2019.

Factors Affecting Our Performance

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

In addition, the number of hours streamed on our platform is a critical element of our business because hours determine our advertising inventory and sell through.

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

User acquisition strategy

We acquire users through three primary ways:

we sell streaming players, we partner with TV brands through our Roku TV licensing program, and we have licensing relationships with service operators.

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

We monetize our user base through platform revenue.

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

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

Ability to monetize users and streaming hours

Our business model is to increase the number of active accounts and related streaming hours and grow revenue and gross profit through the monetization of our streaming platform.

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

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

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

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

fee to users.

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

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

AVOD is our fastest growing area of business, and we are increasing the monetization of these streaming hours by expanding our advertising capabilities both on and off our platform.

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

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

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

In late 2017, we launched The Roku Channel, which offers ad-supported free access for users to a collection of films, television series and other content, and at the same time we began a fundamental transition to increase digital advertising inventory under our control and to create another way of connecting content publishers with users.

The Roku Channel has grown from providing customers with free access to 1,000 movies and TV episodes, initially, to over 10,000 hit Hollywood movies, TV shows, news and more and is rapidly becoming one of our leading sources of advertising inventory.

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

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

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

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

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

Continued investment in growth

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

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

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

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

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

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

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

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

In particular, these investments will include:

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

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

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

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

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

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Platform Revenue

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

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

To date, we generate most of our platform revenue in the United States.

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

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

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

To date, we have generated most of our platform revenue in the United States.

Player Revenue

We generate player revenue primarily from the sale of streaming players through consumer retail distribution channels, including major brick and mortar retailers, such as Best Buy and Walmart, and online retailers, primarily Amazon.

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

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

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

To enhance user experience, we introduced wireless speakers in 2018 that work with Roku TV models and introduced the Roku Smart Soundbar and the Roku Wireless Subwoofer in September 2019.

In our international markets, we primarily sell our

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

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

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

Cost of Revenue

Cost of Platform Revenue

Cost of platform revenue consists of advertising inventory acquisition costs, payment processing fees, third-party cloud service fees, content licensing fees and allocated personnel-related costs, including salaries, benefits and stock-based compensation for our personnel who support platform services.

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

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

Cost of Player Revenue

Cost of player revenue is comprised of player manufacturing costs payable to our third-party contract manufacturers, technology licenses or royalty fees, inbound and outbound freight, duty and logistics costs, third-party packaging and assembly costs, provision for excess or obsolete inventory, allocated overhead costs related to facilities and customer support, and salary, benefits and stock-based compensation costs for operations personnel.

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

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

Operating and Other Expenses

Research and Development

Research and development expenses consist primarily of personnel-related costs, including employee salaries, benefits and stock-based compensation for our engineers and other employees engaged in the development of our products including new player and platform technologies, features and functionality and fees for outsourced consulting services.

Research and development expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation for our development teams as well as outsourced development fees.

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

We believe continued investment is important to attaining our strategic objectives.

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

Sales and Marketing

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

Sales and marketing expenses also include marketing, retail and merchandising costs, as well as events, public relations and other professional services and allocated facilities and overhead.

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

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

General and Administrative

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

We expect our general and administrative expenses to increase due to the anticipated growth of our business and related infrastructure, compliance with global laws and regulations, as well as accounting, legal, insurance, investor relations and other costs associated with being a public company.

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

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

We expect our general and administrative expenses to increase due to the expansion of our business and related infrastructure.

Other Income (Expense), Net

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

Other income (expense), net, for the year ended December 31, 2017 consisted of changes in the fair value of our convertible preferred stock warrant liability, interest expense on our debt, and foreign currency re-measurement and transaction gains and losses.

Prior to our IPO, the underlying shares of our convertible preferred stock warrants were contingently redeemable, and we accounted for these warrants as a liability at fair value and re-measured the fair value at each balance sheet date.

As a result of our IPO, the convertible preferred stock warrant liability was reclassified to stockholders’ equity and re-measurement was no longer required.

Income Tax Expense

Our income tax expense consists primarily of income taxes in certain foreign jurisdictions where we conduct business and state minimum income taxes in the United States.

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

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

Income Tax (Benefit) Expense

Our income tax (benefit) expense consists primarily of income taxes in certain foreign jurisdictions where we conduct business and state income taxes in the United States.

We have a valuation allowance for U.S.

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Loss from Operations

Other Income (Expense), Net:

Interest expense

Loss on extinguishment of debt

Change in fair value of preferred stock warrant liability

Other income (expense), net

Total other income (expense), net

Other Income, Net:

Other income, net

Total other income, net

Loss before income taxes

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

In addition to an increase in content distribution revenue, the majority of the increase is from higher advertising revenue.

The increase was partially offset by a decrease of $7.7 million in licensing revenue which resulted from delivery of intellectual property that was lower in 2019 as compared to 2018 .

Player revenue increased by $62.5 million, or 19%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

During the year ended December 31, 2019, the volume of players sold increased 29% as compared to the year ended December 31, 2018 offset by a 9% decrease in the average selling price of players.

Revenue generated from the sale of audio products is included in player revenue and is not significant.

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

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

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

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

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

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

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

Cost of Revenue

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

This increase is a result of higher advertising inventory acquisition costs, ad serving costs, content licensing fees and credit card processing fees totaling $133.4 million as well as an $8.9 million increase in allocated overhead primarily in advertising operations and content distribution operations driven by the growth of the platform business.

Gross profit for platform revenue increased by $181.8 million, or 61%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily driven by growth in our platform revenues.

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

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

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

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

The cost of player revenue increased approximately $49.3 million due to an increase in manufacturing costs to support a higher volume of players sold.

In addition, royalty expenses increased $21.7 million driven by increased volume of sales and approximately $9.3 million of royalties accrued for

intellectual property claims.

The increase in royalty expenses also includes the impact of the release of an accrual of $8.9 million in the second quarter of 2018 pursuant to a potential intellectual property liability that did not materialize or reoccur in fiscal 2019.

Additionally, freight costs increased by $3.2 million to support higher volume.

Gross profit for player revenue decreased by $18.7 million, or 52%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to the impact of royalty accruals and releases as noted above, and the decrease in the average selling prices of players and increase in manufacturing and logistics costs.

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

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

Packaging and other overhead costs increased by $8.7 million.

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

Operating Expenses

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

The increase was primarily due to higher personnel-related costs of $68.8 million as a result of increased engineering headcount of 37% and related stock-based compensation, higher facilities costs of $14.7 million and higher platform and product development costs of $10.8 million.

These platform and product development costs include expenses such as consulting and outside services, as well as travel and equipment, which are partially offset by allocation of overhead to player and platform costs.

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

Sales and marketing

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

The increase was primarily due to higher personnel-related costs of $38.2 million related to increased headcount of 82% and related stock-based compensation to support our growth in platform revenue, mainly in advertising and content distribution.

Other sales and marketing expenses include an increase of $19.5 million in marketing, retail and merchandising costs, higher facilities costs of $11.0 million and an increase in other expenses of $7.3 million that includes consulting services and travel.

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

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

General and administrative

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

The increase was primarily due to higher personnel-related costs of $23.6 million as a result of increased headcount in general and administrative functions of 46% including stock-based compensation expense and $19.0 million primarily related to increased legal and other outside consulting and professional service fees.

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

Other Income (Expenses), Net

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Other income (expenses), net

Other income (expense), net, increased by $0.2 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to an increase in interest expense relating to amortization of deferred debt costs and interest expense related to the Credit Facility, offset by an increase in interest income from short-term investments and a higher level of cash balances.

Income Tax Benefit

Years Ended December 31,

(in thousands, except percentages)

Income Tax Benefit

Income tax benefit

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

Comparison of years ended December 31, 2018 and 2017

Years Ended December 31,

(in thousands, except percentages)

Total Net Revenue

Platform revenue increased by $191.5 million, or 85%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017 and is inclusive of $25.2 million recognized as a result of the adoption of ASC 606.

The increase includes $170.6 million from increases in advertising, subscription and transaction revenue share and the number of paid subscriptions.

The revenues from licensing arrangements with service operators and TV brands increased by $21.2 million mainly driven by the delivery of intellectual property to a licensing partner during the first quarter of 2018.

Player revenue increased by $38.2 million, or 13%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase in player revenue was mainly a result of an increase in the volume of players sold mitigated by a reduction in the average selling price of the players.

An increase of 19% in the volume of players sold, consisting mainly of our lower priced players, resulted in a 6% decrease in the average selling price of the players.

Audio products launched towards the end of the year are included in player revenues and contributed insignificant revenues.

Cost of Revenue

Years Ended December 31,

(in thousands, except percentages)

Cost of revenue:

Total Cost of Revenue

Gross profit:

Total Gross Profit

The cost of platform revenue increased by $65.7 million, or 120%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

Advertising inventory acquisition costs, ad serving costs, content acquisition fees and credit card processing fees increased by $55.2 million and allocated overhead increased by $9.4 million during the year ended December 31, 2018.

The increase is driven by the growth of our platform business which attracts additional advertisements and monetization opportunities.

Gross profit for platform revenue increased by $125.8 million, or 74%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily driven by growth in our platform revenues.

The increase includes $10.1 million recognized as a result of the adoption of ASC 606 .

The cost of player revenue increased by $31.7 million, or 12%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase in cost of player revenue was primarily the result of approximately $44.0 million in increased manufacturing and related costs to support the increased volume of players sold, offset by the release of accruals related to IP licensing obligations that did not materialize and management now believes will not materialize in the amount of approximately $8.9 million and a reduction in freight costs of $4.6 million.

The reduction in freight cost is due to higher costs incurred in the year ended December 31, 2017 to expedite inbound supply to minimize the effect of supply disruption, which did not reoccur in the year ended December 31, 2018.

Gross profit for player revenue increased by $6.5 million, or 22%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to the release of accruals related to unrealized IP licensing obligations during the second quarter of 2018 and reduced freight costs .

Operating Expenses

Years Ended December 31,

(in thousands, except percentages)

Research and development

Sales and marketing

General and administrative

Total Operating Expenses

Research and development

Research and development expenses increased by $62.7 million, or 58%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase was primarily due to higher personnel-related costs of $51.1 million as a result of increased engineering headcount of 36%, higher facilities costs of $4.1 million and higher platform and product development costs of $7.6 million that includes expenses such as consulting and outside services, travel and equipment, offset by allocation of overheads.

Sales and marketing

Sales and marketing expenses increased by $38.7 million, or 60%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase was primarily due to higher personnel-related costs of $29.8 million related to increased headcount of 43%, higher facilities costs of $3.3 million, increases in consulting expenses of $2.2 million and higher travel and entertainment expenses of $1.3 million.

General and administrative

General and administrative expenses increased by $24.5 million, or 52%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

The increase was primarily due to higher personnel-related costs of $14.6 million as a result of increased headcount in general and administrative functions of 26%, an increase in consulting and professional service fees of $9.7 million related to increased accounting and legal services and an increase of $2.1 million in facilities costs.

Other Income (Expenses), Net

Years Ended December 31,

(in thousands, except percentages)

Interest expense

Loss on extinguishment of debt

Change in fair value of convertible preferred stock warrants

Other income, net

Total Other Income (Expense), Net

Other income (expense), net, changed by $47.5 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to a charge of $40.3 million that was recorded during the year ended December 31, 2017 related to the change in the fair value of warrants to purchase convertible preferred stock.

No such charge was required during the year ended December 31, 2018 as warrants to purchase convertible preferred stock were converted into warrants to purchase common stock upon our IPO.

Other income (expense), net, increased by $3.6 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017 due to an increase in interest income from a higher cash balance, short-term investments earned in the second half of the year and a one-time cancellation and restocking fee of $1.4 million from a customer.

Interest expense for the year ended December 31, 2017 was higher by $1.3 million due to outstanding debt during that period.

No such debt was outstanding in 2018.

Income Tax (Benefit) Expense

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

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

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

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

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

Income Tax (Benefit) Expenses

Years Ended December 31,

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Income tax (benefit) expense

Income tax (benefit) expense is comprised of foreign income tax and state minimum income taxes in the United States.

Income tax benefit

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

Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $1,092.8 million.

Our primary source of liquidity is cash generated through operating and financing activities, including sales of our Class A common stock and our capacity to borrow under the Credit Agreement.

Our primary uses of cash include operating expenses such as personnel-related expenses, consultants and professional services, and investments in capital spending.

Our future capital requirements may vary materially from those currently planned and will depend on many factors including our growth rate and the continuing market acceptance of our advertising platform, operating system and technology and players along with the timing and effort related to the introduction of new platform features, players, hiring of experienced personnel, the expansion of sales and marketing activities, as well as overall economic conditions.

We entered into lease agreements for new corporate headquarters, as well as other office locations.

We have incurred material expenses in 2019 and expect to continue to incur material expenses in future years for facility and related building costs.

We completed the acquisition of dataxu, Inc.

in November 2019 for a total purchase consideration of $148.4 million, which consisted of $78.7 million in cash and $69.7 million for the fair value of our 571,459 shares of common stock.

We may contemplate additional merger and acquisition activity that could materially impact our liquidity and capital resource position.

However, we believe that our existing cash balances and cash flow from operations, together with amounts available under our Credit Agreement, will be sufficient to fund our working capital and meet our anticipated cash needs for the foreseeable future.

As of December 31, 2019, approximately 1.4% of our cash was held outside the United States.

These amounts were primarily held in Europe and are utilized to fund our foreign operations.

The amount of unremitted earnings related to our foreign subsidiaries is not material.

At-the-Market Offerings

On March 12, 2019, we entered into an Equity Distribution Agreement with Citigroup Global Markets Inc., as our sales agent (the “Citi Equity Distribution Agreement”), pursuant to which we could issue and sell from time-to-time shares of our Class A common stock for aggregate gross proceeds of up to $100.0 million.

In March 2019, we sold approximately 1.4 million shares of Class A common stock at an average selling price of $72.00 per share, constituting all available shares for sale under the Citi Equity Distribution Agreement, for aggregate gross proceeds of $100.0 million and incurred issuance costs of $2.0 million.

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

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

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

Other uses of cash include purchases of property and equipment.

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

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

and internationally.

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

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

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

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

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

We may attempt to raise additional capital through the sale of equity securities or other financing arrangements.

If we raise additional funds by issuing equity, the ownership of our existing stockholders will be diluted.

Our Credit Agreement expires in February 2023.

If we raise additional financing by the incurrence of additional indebtedness, we may be subject to fixed payment obligations and also to restrictive covenants.

At-the-Market Offering

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

LLC, as our sales agent (the “MS Equity Distribution Agreement”), pursuant to which we could issue and sell up to 1.0 million shares of our Class A common stock.

In May 2019, we sold all 1.0 million available shares for sale under the MS Equity Distribution Agreement at an average selling price of $82.90 per share, for aggregate gross proceeds of $82.9 million and incurred issuance costs of $1.6 million.

On November 19, 2019, we entered into and Equity Distribution Agreement with Citigroup Global Markets Inc.

as our sales agent (the “Citi Equity Distribution Agreement – 2”), pursuant to which we could issue and sell from time-to-time up to an aggregate of 1.0 million shares of our Class A common stock.

In November 2019, we sold all 1.0 million shares available for sale under the Citi Equity Distribution Agreement – 2 at an average selling price of $153.99 per share for aggregate gross proceeds of $153.99 million and incurred issuance cost of $2.8 million.

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

Senior Secured Term Loan A and Revolving Credit Facilities

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

On the Original Closing Date, we terminated the Restated 2014 LSA (as defined below) with Silicon Valley Bank.

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

On November 18, 2019, we borrowed from the Term Loan A facility in the aggregate principal amount of $100.0 million and elected a Eurodollar borrowing with interest at a rate equal to the adjusted one-month LIBOR rate plus an applicable margin of 1.75% based on our secured leverage ratio.

Loans under the Term Loan A Facility will amortize in equal quarterly installments beginning 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.

We did not have any borrowings outstanding on the Revolving Credit Facility as of December 31, 2019.

We had outstanding letters of credit as of December 31, 2019, which reduced the balance available to draw on the Revolving Credit Facility to $69.3 million.

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

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

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

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

In the future, certain of our direct and indirect subsidiaries may be required to guarantee the Credit Agreement.

We may prepay, and in circumstances are 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 us to maintain a certain adjusted quick ratio of at least 1.00 to 1.00, and cu stomary events of default.

As of December 31, 2019, we were in compliance with all the covenants of the Credit Agreement.

As of December 31, 2020, we were in compliance with all of the covenants of the Credit Agreement.

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

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

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

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Our operating activities provided cash of $148.2 million for the year ended December 31, 2020.

Our net loss of $59.9 million for the year ended December 31, 2019 was adjusted by non-cash charges of $102.7 million comprising mainly of $85.2 million of stock-based compensation and $15.7 million of depreciation and amortization primarily on property and equipment.

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

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

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

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

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

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

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

These outflows were offset by cash inflows of $79.1 million from an increase in accrued liabilities due to timing of payments, increased content publishers payables, and overall growth in the volume of business , $22.3 million from amortization of operating lease right-of-use assets, $11.7 million from an increase in operating lease liabilities, $9.4 million from an increase in accounts payable, and $1.1 million from a decrease in deferred cost of revenue.

Our operating activities generated $13.9 million in cash for the year ended December 31, 2018.

Our net loss of $8.9 million for the year ended December 31, 2018 was adjusted by non-cash charges of $48.4 million comprising mainly of $8.4 million of depreciation and amortization, $37.7 million of stock-based compensation, $1.1 million relating to loss incurred on exiting facilities and $0.9 million of provision related to doubtful accounts.

The changes in our operating assets and liabilities used cash of $25.6 million comprising of outflows of $50.7 million from an increase in accounts receivable due to increased seasonal revenues in the fourth quarter, $3.0 million from increasing inventory levels and $1.1 million from a decrease in other long-term liabilities.

These outflows were offset by cash inflows of $17.9 million from an increase in accrued liabilities, $10.1 million from an increase in deferred revenue and $2.3 million from a decrease in deferred cost of revenue.

During the year ended December 31, 2017, operating activities generated $37.3 million in cash as a result of net loss of $63.5 million, adjusted by non-cash charges of $60.4 million and an increase of $39.5 million in our net operating assets and liabilities.

The non-cash charges comprise mainly of $40.3 million of change in fair value of preferred stock warrants, $11.0 million of stock-based compensation, $5.3 million of depreciation and amortization, $2.3 million of loss from extinguishment of debt and $0.5 million of loss relating to exit from our prior headquarter facilities.

The increase in operating assets and liabilities was the result of an increase in accounts payable and accrued liabilities of $48.4 million due to both the growth in business and the timing of payments, an increase in deferred revenue balances of $30.0 million, a decrease in inventories of $10.8 million, and an increase in other long-term liabilities by $3.6 million.

These increases were offset by an increase in accounts receivable of $41.2 million as a result of growth in our business, an increase in prepaid and other current assets of $6.5 million and an increase in other non-current assets of $2.8 million.

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

Cash Flow from Investing Activities

Our investing activities for the year ended December 31, 2019 included a cash outflow of $77.2 million for the purchase of property and equipment, including expenditures on leasehold improvements related to expanding our facilities, and other capital investments, $68.1 million related to the acquisition of dataxu, Inc., $12.4 million spent on the purchase of short-term investments, and $7.4 million related to the purchases of other intangible assets, partially offset by $54.8 million received from sales/maturities of short-term investments.

Our investing activities for the year ended December 31, 2018 included cash outflow of $18.3 million spent on the purchase of property and equipment, including expenditure on leasehold improvements related to expanding our facilities, and other capital investments and $53.8 million spent on the purchase of short-term investments, partially offset by $12.0 million received from sales/maturities of short-term investments.

During the year ended December 31, 2017, investing activities used $12.3 million in cash mainly on capital expenditures related to the purchase of property, equipment and leasehold improvements of $9.2 million and acquisition of a business of $3.0 million.

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

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

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

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

Cash Flow from Financing Activities

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

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

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

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

Our financing activities provided cash of $458.3 million for the year ended December 31, 2019.

The cash was generated mainly from the exercise of employee stock options amounting to $25.0 million partially offset by a payment of $0.5 million in connection with a previous business acquisition.

During the year ended December 31, 2017, financing activities provided $117.7 million in cash primarily from the sale of shares in our IPO net of issuance cost of $131.6 million, proceeds from exercise of stock options of $1.8 million offset by net repayment of debt of $15.8 million.

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

Off-Balance Sheet Arrangements

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Represents the principal amount of Term Loan A Facility.

For additional information regarding the terms of the debt and interest payable, see Note 10 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

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

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

Represents future minimum lease payments under operating leases.

Represents commitments included in other non- cancelable arrangements like content licensing, advertising buys and other platform services.

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

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

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

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

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

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

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

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

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

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

As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table does not include $19.5 million of such non-current liabilities not included in other liabilities on our consolidated balance sheet as of December 31, 2019.

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

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

Critical Accounting Policies and Estimates

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The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

These estimates and assumptions are affected by management’s application of accounting policies, as well as uncertainty in the current economic environment due to the ongoing COVID-19 pandemic.

We evaluate our estimates and assumptions on an ongoing basis.

Our estimates are based on historical experience, current trends and other factors that we believe to be reasonable at the time our consolidated financial statements are prepared.

Our actual results could differ from these estimates.

The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below.

Revenue Recognition

We derive revenue primarily from platform services and sales of our players.

We recognize revenue when control of promised products or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.

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

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

In a multiple element arrangement, revenue recognition of each distinct performance obligation in the estimated transaction price of a contract is based on the expected value for which a significant reversal of revenue is not expected to occur.

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

We compute transaction price of each contract and allocate that to each performance obligation based on a relative stand-alone selling price (“SSP”).

Determining the SSP for each distinct performance obligation requires judgement.

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

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

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

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

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

Determining whether we are the principal or the agent in an arrangement requires judgement.

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

Our revenue is generated from the following two segments:

Platform segment :

Our platform segment generates revenue from sale of digital advertising, fees earned from the use of our platform, content distribution services including premium subscription services, sale of branded channel buttons on remote controls, and licensing arrangements with TV brands and service operators.

Our advertising revenue is mostly generated through video and display advertising delivered through advertising impressions.

Advertising is typically sold on a cost-per-thousand (“CPM”) basis and is evidenced by an Insertion Order, (“IO”).

Revenue is recognized as the number of impressions are delivered.

IOs may include multiple performance obligations as they contain distinct advertising products or services.

For such arrangements, we allocate revenue to each distinct performance obligation based on its relative SSP.

We also generate revenue from our customers using our platform, for which we charge a platform fee, which is a percentage of a customer’s advertising inventory purchases during the month, plus data and any add-on features through the platform.

We recognize revenue on either a gross or net basis for digital advertising based on our determination as to whether we are acting as the principal in the revenue generation process or as an agent.

Where we are the principal, we control the advertising inventory before it is transferred to our customers.

This is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.

Digital advertising is comprised of performance obligations that are recognized either at a point in time or over time depending on the nature of the advertising product.

We earn content distribution revenue through various forms of revenue sharing arrangements with our content publishers.

The revenue sharing arrangements generally apply to new subscriptions for accounts that sign up for new services on our platform and at the time of a movie rental or purchase.

Revenue is recognized on a net basis as we are deemed to be the agent between content publishers and end users.

The performance obligation is to distribute content publishers’ content on our platform.

Consequently, the portion of the gross amount billed to end users that is remitted to content publishers is not reflected as revenue.

Revenue is recognized on a time elapsed basis, by day, as the services are delivered over the contractual distribution term.

We also sell monthly subscriptions for premium content available on The Roku Channel for varying fees for different content.

We recognize revenue from such premium subscription fees on a gross basis over the service period as we are deemed to be the principal because we maintain the relationship with the end user, we obtain control of the content before transferring it to the end user, and we have latitude in establishing pricing.

We pay fixed fees to the providers of premium content on The Roku Channel based on the contractual arrangement with them and recognize that as direct cost.

We sell branded channel buttons on player and TV remote controls that provide one-touch access to a publishers’ content.

We typically receive a fixed fee per button for each player or TV unit sold over a defined distribution period.

Revenue is recognized on a time elapsed basis, by day, over the distribution term.

We license our technology and proprietary operating system to TV brands and service operators.

Arrangements with TV brands commonly include a license to our technology and proprietary operating system over a specified term, including updates and upgrades.

The revenue for licensing of technology and the Roku OS is recognized at a point in time, when the control has transferred to the customer, which usually occurs when we make the intellectual property available to the customer.

The revenue allocated to unspecified upgrades 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.

Arrangements may also include marketing development funds paid to TV brands.

Marketing development funds are reflected as a reduction to the estimated transaction price.

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

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

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

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

Player segment:

We sell the majority of our players through retail distribution channels, including brick and mortar, online retailers and through our website.

Our player segment has two performance obligations.

The hardware and embedded software are considered as one performance obligation and we recognize revenue at a point in time when control has transferred to the customer, which is based on the contractual terms.

Our unspecified upgrades or enhancements are available to customers on a when-and-if available basis.

We record the allocated value of the unspecified upgrades as deferred revenue and recognize it as player revenue ratably on a time elapsed basis over the estimated economic life of the associated players.

Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.

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

Our player revenue includes allowances for returns and sales incentives in the estimated transaction price.

The estimates for returns and sales incentives are based on historical experience and anticipated performance.

We provide unspecified upgrades and updates to our player end users.

We record the allocated value of these as deferred revenue and recognize it ratably on a time elapsed basis over the estimated economic life of the associated players.

Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.

Business Combinations

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

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

preliminary purchase price allocation.

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

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We measure recoverability of goodwill at the reporting unit level.

In performing our annual assessment, we first perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If necessary, we then perform a quantitative test.

To conduct the quantitative impairment test of goodwill, we compare the fair value of a reporting unit to its carrying value.

We estimate the fair values of our reporting units using discounted cash flow models or other valuation models, such as comparative transactions and market multiples.

If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.

Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.

When impaired, the carrying value of goodwill is written down to fair value.

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

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

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

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

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

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

If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts.

Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.

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

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

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

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

Valuation of Inventory

We value inventory at the lower of cost or net realizable value with cost determined on a first-in, first-out basis.

We base write-downs of inventories upon current facts and circumstances.

We perform a detailed assessment of excess and obsolete inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions.

Based on this analysis, we record adjustments, when appropriate, to reflect inventory of finished products, materials on hand and purchase commitments at lower of cost or net realizable value.

We establish a reserve for inventory or materials which are not forecasted to be consumed.

Although we try to ensure the accuracy of our forecasts of player demand and pricing assumptions, any significant unanticipated changes in demand, pricing or technological developments could significantly impact the value of our inventory and our reported operating results.

If we find that our supply estimates exceed our inventory demands, our inventory is written-down and charged to cost of revenue at the time of such determination.

Conversely, if assumptions or circumstances beyond our control change and we subsequently sell players that have previously been written-down, our gross margin in the period of sale will be favorably impacted.

The inventory provisions recorded are net of the reversals of provisions for sales of previously written-down inventory for each period presented.

Allowances for Returns, Sales Incentives and Doubtful Accounts

Accounts receivable are stated at invoice value less estimated allowances for returns, customer incentives and doubtful accounts.

To determine the allowances for returns, sales incentives and doubtful accounts, we perform an ongoing analysis of various factors including our historical experience, recent write-offs and specific analysis of significant receivables that are past due.

Allowances for Sales Returns, Sales Incentives and Doubtful Accounts

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

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

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

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

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

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

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Fair Value of Our Common Stock .

Prior to our IPO, the fair value of the common stock underlying our stock options was determined by our Board of Directors.

The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Our Board of Directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date, including but not limited to the prices, rights, preferences and privileges of our preferred stock relative to the common stock, our operating and financial performance, current business conditions and projections, our stage of development, likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an IPO or sale of our company, given prevailing market conditions, any adjustment necessary to recognize a lack of marketability of the common stock underlying the granted options, the market performance of comparable publicly-traded companies, and the U.S.

and global capital market conditions.

Subsequent to our IPO, we use the market closing price for our Class A common stock as reported on The Nasdaq Global Select Market on the date of grant.

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

Expected Term.

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Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes.

The guidance is effective for fiscal years beginning after December 15, 2020, including interim reporting periods within those fiscal years, with early adoption permitted.

We are currently in the process of evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Topic 350), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized.

The guidance is effective either prospectively or retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

We are currently in the process of evaluating the effects of the new guidance but do not expect the impact from this standard to be material.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .

The guidance removes, modifies, and adds certain disclosure requirements for fair value measurements.

This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

We are currently in the process of evaluating the effects of the new guidance but do not expect the impact from this standard to be material.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment .

The guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e.

Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e.

Step 1 of the current guidance).

The amendments in this update will be effective for fiscal years beginning after December 15, 2019 and should be applied prospectively.

Early adoption is permitted for impairment testing dates after January 1, 2017.

We are currently in the process of evaluating the effects of the new guidance but do not expect the impact from this standard to be material.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The guidance amends reporting of credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.

The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations.

The amendments in this update will be effective for fiscal years beginning after December 15, 2019.

We are currently in the process of evaluating the effects of the new guidance but do not expect the impact from this standard to be material.

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

They are incorporated herein by reference.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis