# ROKU, INC (ROKU) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ROKU, INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1428439/000142843922000010/roku-20211231.htm
Accession: 0001428439-22-000010
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ROKU/
All MD&A years: /company/ROKU/mda/
Next year: /company/ROKU/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the section titled Item 1A. Risk Factors and the Note Regarding Forward-Looking Statements.

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

Overview

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

Player revenue is generated primarily from the sale of streaming players and audio products. We expect to continue to manage the average selling prices (“ASP”) of our streaming players to increase our active accounts. We expect that the trade off from player gross profit or loss to grow active accounts will result in increased platform revenue and platform gross profit.

COVID-19 Update

The widespread global impact from the COVID-19 pandemic continued through 2021. Governmental authorities have put in place various precautionary measures and promoted vaccination programs to slow down the spread of the virus. The impact of the pandemic continues to vary by geography as well as over time as different variants of the virus surface. The majority of our workforce continues to work from home to protect the health and safety of our employees, and business travel continues to be curtailed. We evaluate and refine our return to office strategy by geography as circumstances change. We expect that most employees will adopt a hybrid work schedule (consisting of both in-person work and working from home) in 2022.

The COVID-19 pandemic, and the resulting precautionary measures, have caused, and are expected to continue to cause, economic uncertainty both in the United States and globally as well as significant volatility in, and disruption to, financial markets and supply chains. Global supply chain disruptions have resulted in shipping delays, increased shipping costs, component shortages, and increases in component prices. In addition, some of our TV brand partners have faced inventory challenges that have negatively impacted their unit sales.

The COVID-19 pandemic has accelerated the shift of TV viewing away from legacy TV to streaming TV. During the year ended December 31, 2021, we continued to see an increase in the number of active accounts, but the growth rate was slower than in the prior year. Active accounts increased to 60.1 million as of December 31, 2021, growing 17% year-over-year. Streaming hours for the year ended December 31, 2021 increased to 73.2 billion, growing 25% year-over-year.

We have largely been able to maintain an inventory of our players, audio products, and accessories in stock at retailers and online stores throughout the COVID-19 pandemic. However, like many companies, we have been negatively affected by the constraints in the global supply chain, which have resulted in shortages of certain components, increased component costs, shipping constraints, and increased shipping costs. Player unit sales were down in the second half of 2021, year-over-year, due to the demand spike in the second half of 2020 because of the COVID-19 pandemic. In 2021, we insulated our customers from the rising player-related costs and prioritized account acquisition growth, which strategically supports our Average Revenue per User (“ARPU”) growth. The increasing component costs put additional constraints on our player gross margin resulting in a gross loss in the player segment for the year ended December 31, 2021. Though we do not believe that the cost constraints and supply chain issues are permanent, they may continue to impact us in the near future, and we expect player gross margin to be negative until such conditions normalize.

49

Our platform segment continues to perform well, with platform revenue increasing to $2,284.9 million for the year ended December 31, 2021, reflecting year-over-year growth of 80%. Our ARPU grew to $41.03, up 43% year-over-year. Almost every major media company has reorganized around streaming and, as a result, our content distribution business has benefited as our active accounts growth was accompanied by continued consumer demand for both ad-supported and subscription services, and increased media and entertainment promotional spending by our content partners. We believe advertising budgets will continue to shift from legacy TV to streaming TV and that we will benefit from this shift due to our advanced advertising capabilities. During the fourth quarter of 2021, however, certain advertising verticals experienced supply chain disruptions that negatively impacted product availability and resulted in reduced advertising spend. While we have experienced an increase in TV streaming during the COVID-19 pandemic and our business generally has benefited, there can be no assurance that these patterns will continue into 2022.

Key Performance Metrics

The key performance metrics we use to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions are gross profit, active accounts, streaming hours, and ARPU.

Gross Profit

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

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

Active Accounts

We believe that the number of active accounts is a relevant measure to gauge the size of our user base. We define active accounts as the number of distinct user accounts that have streamed content on our platform within the last 30 days of the period. Users who streamed content from The Roku Channel only on non-Roku platforms are not included in this metric. The number of active accounts also does not correspond to the number of unique individuals who actively utilize our platform, or the number of devices associated with an account. For example, a single account may be used by more than one individual, such as a family, and one account may be used on multiple streaming devices.

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

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. We define streaming hours as the aggregate amount of time streaming devices stream content on our platform in a given period. Hours streamed from The Roku Channel on non-Roku platforms are not included in this metric. We report streaming hours on a calendar basis.

Additionally, we believe that over time, increasing user engagement on our streaming platform increases our platform monetization because we earn platform revenue from various forms of user engagement, including advertising, as well as revenue shares from subscriptions and transactional video on-demand. However, our revenue from content publishers is not tied to the hours streamed on their streaming channels, and the number of streaming hours does not correlate to revenue earned from such content publishers or ARPU on a period-by-period basis. Moreover, streaming hours on our platform are measured whenever a Roku player or a Roku TV is streaming content, whether a viewer is actively watching or not. For example, if a Roku player is connected to a TV, and the viewer turns off the TV, steps away, or falls asleep and does not stop or pause the player, then the particular streaming channel may continue to play content for a period of time determined by the streaming channel. We believe that this also occurs across a wide variety of non-Roku streaming devices and other set-top boxes.

Since the first quarter of 2020, all of our devices include a Roku OS feature that is designed to identify when content has been continuously streaming on a channel for an extended period of time without user interaction. This feature, which we refer to as “Are you still watching,” periodically prompts the user to confirm that they are still watching the selected channel and closes the channel if the user does not respond affirmatively. We believe that the implementation of this feature across the Roku platform benefits us, our customers, channel partners, and advertisers. Some of our leading channel

50

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

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.

51

[[GREPCENT_TABLE]]
[["Quarter","Published SHs","Revised SHs","SHs % Delta","Published YoY","Revised YoY"],["2017 Q1","3.3B","3.2B","(0.5)%","63.4%","NA"],["2017 Q2","3.5B","3.5B","(0.4)%","60.0%","NA"],["2017 Q3","3.8B","3.8B","(0.4)%","57.8%","NA"],["2017 Q4","4.3B","4.3B","(0.2)%","55.3%","NA"],["2018 Q1","5.1B","5.1B","(0.5)%","56.0%","56.1%"],["2018 Q2","5.5B","5.4B","(0.5)%","57.2%","57.0%"],["2018 Q3","6.2B","6.1B","(0.7)%","62.7%","62.1%"],["2018 Q4","7.3B","7.1B","(2.2)%","68.6%","65.2%"],["2019 Q1","8.9B","8.4B","(5.4)%","74.1%","65.5%"],["2019 Q2","9.4B","8.8B","(6.0)%","72.1%","62.6%"],["2019 Q3","10.3B","9.6B","(6.5)%","67.6%","57.9%"],["2019 Q4","11.7B","10.9B","(6.3)%","60.2%","53.7%"],["2020 Q1","13.2B","12.3B","(7.0)%","49.3%","46.8%"],["Year","Published SHs","Revised SHs","SHs % Delta","Published YoY","Revised YoY"],["2017","14.8B","14.8B","(0.4)%","58.8%","NA"],["2018","24.0B","23.7B","(1.1)%","61.7%","60.5%"],["2019","40.3B","37.8B","(6.1)%","67.8%","59.3%"]]
[[/GREPCENT_TABLE]]

Average Revenue per User

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.

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

Components of Results of Operations

Revenue

Platform Revenue

We generate platform revenue from digital advertising sales and related services including our OneView ad platform, content distribution services (such as subscription and transaction revenue sharing arrangements, media and entertainment promotional spending, the sale of Premium Subscriptions, and the sale of branded channel buttons on remote controls), and licensing arrangements with service operators and TV brands. Our ad inventory includes video ad inventory from AVOD content in The Roku Channel, native display ads on our home screen and screen saver, as well as ad inventory we obtain through our content distribution agreements with publishers. To supplement supply, we re-sell video inventory that we purchase from content publishers and, to a lesser extent, directly sell third-party inventory on a revenue share basis. 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, including Amazon. We generate most of our player revenue in the United States. In our international markets, we primarily sell our players through wholesale distributors which, in turn, re-sell to retailers. We currently distribute our players in various countries in North America, South America, and Europe.

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

52

Cost of Platform Revenue

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

Cost of Player Revenue

Cost of player revenue is comprised mostly of manufacturing costs for streaming players and audio products payable to our third-party contract manufacturers and technology licenses or royalty fees. Cost of player revenue also includes inbound and outbound freight, duty and logistics costs, third-party packaging, inventory reserves, and allocated overhead costs related to facilities and customer support, and salaries, benefits, and stock-based compensation for operations personnel.

Operating and Other Expenses

Research and Development

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

Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions, and stock-based compensation for our employees engaged in sales and sales support, marketing, communications, data science and analytics, business development, product management, and partner and customer support functions. Sales and marketing expenses also include marketing, retail and merchandising costs, and allocated facilities and overhead expenses. We expect sales and marketing expenses to increase in absolute dollars in future periods as we focus on growing active accounts, platform and player revenue, and expanding our business internationally.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits, and stock-based compensation for our finance, legal, information technology, human resources, and other administrative personnel. General and administrative expenses also include outside legal, accounting, and other professional service fees as well as allocated facility expenses. We expect our general and administrative expenses to increase due to the expansion of our business and related infrastructure.

Other Income (Expense), Net

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

Income Tax (Benefit) Expense

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. and Netherlands deferred tax assets, including net operating loss carryforwards. U.S. deferred tax assets include tax credits related primarily to research and development. We expect to maintain this valuation allowance for the foreseeable future.

53

Results of Operations

The following table sets forth selected consolidated statements of operations data as a percentage of total revenue for each of the periods indicated.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["Net Revenue:"],["Platform","83","%","","71","%","","66","%"],["Player","17","%","","29","%","","34","%"],["Total net revenue","100","%","","100","%","","100","%"],["Cost of Revenue:"],["Platform","30","%","","28","%","","23","%"],["Player","19","%","","27","%","","33","%"],["Total cost of revenue","49","%","","55","%","","56","%"],["Gross Profit (Loss):"],["Platform","53","%","","43","%","","43","%"],["Player","(2)","%","","2","%","","1","%"],["Total gross profit","51","%","","45","%","","44","%"],["Operating Expenses:"],["Research and development","17","%","","20","%","","24","%"],["Sales and marketing","16","%","","17","%","","16","%"],["General and administrative","9","%","","10","%","","10","%"],["Total operating expenses","42","%","","47","%","","50","%"],["Income (Loss) from Operations","9","%","","(2)","%","","(6)","%"],["Other Income (Expense), Net:"],["Interest expense","\u2014","%","","\u2014","%","","\u2014","%"],["Other income (expense), net","\u2014","%","","\u2014","%","","1","%"],["Total other income (expense), net","\u2014","%","","\u2014","%","","1","%"],["Income (Loss) Before Income Taxes","9","%","","(2)","%","","(5)","%"],["Income tax benefit","\u2014","%","","\u2014","%","","\u2014","%"],["Net Income (Loss)","9","%","","(2)","%","","(5)","%"]]
[[/GREPCENT_TABLE]]

Comparison of Years Ended December 31, 2021 and 2020

Net Revenue

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change $","","Change %"],["(in thousands, except percentages)"],["Platform","$","2,284,925","","","$","1,267,744","","","$","1,017,181","","","80","%"],["Player","479,659","","","510,644","","","(30,985)","","","(6)","%"],["Total net revenue","$","2,764,584","","","$","1,778,388","","","$","986,196","","","55","%"]]
[[/GREPCENT_TABLE]]

Platform

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

54

Player

Player revenue decreased by $31.0 million, or 6%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to a decrease in both the volume of streaming players sold and average selling prices, offset by a slight increase in revenue from the sale of audio products and accessories. During the year ended December 31, 2021, the volume of streaming players sold decreased by 4% and the average selling price of players decreased by 7% as compared to the year ended December 31, 2020. The decrease in the volume of players sold is due to the slowdown in growth in the year ended December 31, 2021 as compared to the year ended December 31, 2020 when the growth was aided by the COVID-19 pandemic. The decrease in the average selling price is due to higher promotions during the year ended December 31, 2021 as compared to the year ended December 31, 2020 where the volume was aided by the COVID-19 pandemic and required fewer promotions.

Cost of Revenue

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change $","","Change %"],["(in thousands, except percentages)"],["Cost of Revenue:"],["Platform","$","823,924","","","$","503,177","","","$","320,747","","","64","%"],["Player","532,060","","","466,992","","","65,068","","","14","%"],["Total cost of revenue","$","1,355,984","","","$","970,169","","","$","385,815","","","40","%"],["Gross Profit (Loss):"],["Platform","$","1,461,001","","","$","764,567","","","$","696,434","","","91","%"],["Player","(52,401)","","","43,652","","","(96,053)","","","(220)","%"],["Total gross profit","$","1,408,600","","","$","808,219","","","$","600,381","","","74","%"]]
[[/GREPCENT_TABLE]]

Platform

The cost of platform revenue increased by $320.7 million, or 64%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. This increase is primarily driven by higher advertising inventory costs, higher content amortization costs, Premium Subscription costs, and credit card processing fees totaling $303.1 million. Platform costs increased an additional $15.3 million due to increases in cloud services costs for supporting the platform and higher personnel costs.

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

Player

The cost of player revenue increased by $65.1 million, or 14%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily due to higher product costs of $35.6 million, an increase in freight costs of $15.0 million, an increase in overhead costs such as cloud services, outsourced consulting services, and personnel costs totaling to $9.4 million, higher royalty expenses of $5.7 million, and an increase in inventory reserves of $2.8 million offset by a reduction in other manufacturing related costs of $3.3 million.

Gross profit for player revenue decreased by $96.1 million, or 220%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, resulting in a gross loss for fiscal year 2021. The increase in costs was driven primarily by higher direct manufacturing costs for player products and accessories as a result of disruptions in the global supply chain driving component prices higher, combined with reduced player revenue in 2021 as compared to 2020. We believe that the cost increases and supply chain issues will continue in the near future, and we expect to incur negative gross margin in the player segment until such conditions normalize.

55

Operating Expenses

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change $","","Change %"],["(in thousands, except percentages)"],["Research and development","$","461,602","","","$","355,784","","","$","105,818","","","30","%"],["Sales and marketing","455,601","","","299,457","","","156,144","","","52","%"],["General and administrative","256,297","","","173,231","","","83,066","","","48","%"],["Total operating expenses","$","1,173,500","","","$","828,472","","","$","345,028","","","42","%"]]
[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased by $105.8 million, or 30%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily due to increases in personnel-related costs of $84.3 million, as a result of increased engineering headcount and related stock-based compensation, and higher consulting, professional services, and cloud services costs of $17.4 million.

Sales and marketing

Sales and marketing expenses increased by $156.1 million, or 52%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily due to increases in personnel-related costs of $91.4 million related to increased headcount and related stock-based compensation in sales and sales support, product management, marketing, and business analytics to support efforts to grow our business. Sales and marketing expenses also include an increase of $44.7 million mainly due to increases in advertising expenses to promote the Roku brand, marketing, retail and merchandising costs, and general sales promotions, an increase of $9.5 million in professional services and consulting fees, and an increase in facilities costs of $8.3 million due to expansion of office spaces.

General and administrative

General and administrative expenses increased by $83.1 million, or 48%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily due to increases in personnel-related costs of $50.0 million related to increased headcount and related stock-based compensation, an increase of $28.3 million related to higher legal expenses, consulting, and professional services fees, and a net increase of $4.8 million related to higher general overhead, business taxes, and similar costs offset by recoveries of credit losses.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change $","","Change %"],["(in thousands, except percentages)"],["Interest expense","$","(2,980)","","","$","(3,432)","","","$","452","","","(13)","%"],["Other income (expense), net","4,467","","","5,233","","","(766)","","","(15)","%"],["Total other income (expense), net","$","1,487","","","$","1,801","","","$","(314)","","","(17)","%"]]
[[/GREPCENT_TABLE]]

Other income (expense), net

Total other income (expense), net, decreased by $0.3 million, or 17%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily driven by foreign exchange losses of $2.5 million and lower interest income of $1.4 million from a decline in interest rates, which impacted our investment yields. This was offset by $3.1 million of other income recognized related to non-cash consideration associated with the delivery of services for a strategic commercial arrangement and decreased interest expense of $0.5 million.

56

Income Tax Benefit

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change $","","Change %"],["(in thousands, except percentages)"],["Income tax benefit","$","(5,798)","","","$","(945)","","","$","(4,853)","","","514","%"]]
[[/GREPCENT_TABLE]]

Income tax benefit

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

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents of $2,146.0 million. Less than 1% of our cash was held outside the United States in accounts held by our foreign subsidiaries, which are used to fund foreign operations.

Our primary sources of cash are receipts from platform and player revenue and proceeds from equity sales, including equity issued pursuant to our employee equity incentive plans. The primary uses of cash are costs of revenue, including costs to acquire advertising inventory, costs to license and produce content, third-party manufacturing costs, as well as operating expenses including payroll-related expenses, consulting and professional service fees, and facility and marketing expenses. Other uses of cash include purchases of property and equipment and mergers and acquisitions.

As our business and workforce continue to expand, we expect to continue to incur expenses for facility and building related costs for our office locations in the United States and internationally. In addition, we expect to continue our investments in purchases of computer systems and other property and equipment. We have pursued merger and acquisition activities, such as the acquisition of the Nielsen AVA business, the This Old House business, and content rights from Quibi, and we may pursue additional merger and acquisition activities in the future, including the acquisition of rights to programming and content assets. These activities can materially impact our liquidity and capital resources.

We believe our existing cash and cash equivalents balance, cash flow from operations, and our undrawn available balance under our Credit Agreement will be sufficient to meet our working capital, capital expenditures, and material cash requirements from known contractual obligations for the next twelve months and beyond. 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 in this Annual Report and the effects of the COVID-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 March 2, 2021, we entered into an Equity Distribution Agreement with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., and Evercore Group L.L.C., as our sales agents, pursuant to which we could offer and sell from time-to-time shares of our Class A common stock for aggregate gross proceeds of up to $1,000.0 million. In March 2021, we sold approximately 2.6 million shares of Class A common stock at an average selling price of $379.26 per share, for aggregate gross proceeds of $1,000.0 million and incurred issuance costs of $10.4 million.

Senior Secured Term Loan A and Revolving Credit Facilities

On February 19, 2019, we entered into a Credit Agreement with Morgan Stanley Senior Funding, Inc. (as amended on May 3, 2019, the “Credit Agreement”), which provides for (i) a four-year revolving credit facility in the aggregate principal amount of up to $100.0 million (the “Revolving Credit Facility”), (ii) a four-year delayed draw term loan A facility in the aggregate principal amount of up to $100.0 million (the “Term Loan A Facility”), and (iii) an uncommitted incremental facility subject to certain conditions (together with the Revolving Credit Facility and the Term Loan A Facility, collectively, the “Credit Facility”).

57

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 be repaid in full by February 2023. Our obligations under the Credit Agreement are secured by substantially all of our assets. The Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires us to maintain a certain adjusted quick ratio of at least 1.00 to 1.00, and customary events of default. As of December 31, 2021, we were in compliance with all of the covenants of the Credit Agreement. See Note 10 to the consolidated financial statements in Item 8 of this Annual Report for additional details regarding the Credit Agreement.

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

Cash Flows

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

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020"],["Consolidated Statements of Cash Flows Data:"],["Cash flows provided by operating activities","$","228,081","","","$","148,192"],["Cash flows used in investing activities","$","(176,819)","","","$","(81,324)"],["Cash flows provided by financing activities","$","1,003,147","","","$","509,048"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Our operating activities provided cash of $228.1 million for the year ended December 31, 2021. Our net income of $242.4 million for the year ended December 31, 2021 was adjusted by non-cash charges of $355.7 million comprised mainly of stock-based compensation, amortization of content assets, depreciation and amortization on property and equipment and intangible assets, and amortization of operating right-of-use assets. The changes in our operating assets and liabilities used cash of $370.0 million mainly from an increase in accounts receivable primarily driven by an increase in revenue, an increase in content assets, an increase in contract assets from revenue recognized from customers, payments made for operating lease liabilities, and a decrease in deferred revenue offset by inflows from an increase in accounts payable and accrued liabilities and a decrease in inventory balances. These changes are mainly due to overall growth in the business combined with the timing of receipts from customers and payments to vendors.

Cash Flows from Investing Activities

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

Cash Flows from Financing Activities

Our financing activities provided cash of $1,003.1 million for the year ended December 31, 2021. The cash was received mainly from proceeds from an at-the-market offering of $989.6 million, net of issuance costs, and proceeds from the exercise of employee stock options of $18.5 million. These inflows were offset by $5.0 million of repayments made on borrowings.

Material Cash Requirements from Known Contractual Obligations

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

•Principal payments related to our Term Loan A Facility that are included in our consolidated balance sheets and the related periodic interest payments. For additional information regarding the terms of the debt and interest payable, see Note 10 to the consolidated financial statements in Item 8 of this Annual Report.

•Commitments to purchase finished goods from our contract manufacturers and other inventory related items. Consistent with industry practices, we enter into firm, non-cancelable, and unconditional purchase commitments with our contract manufacturers to acquire products through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Our contract manufacturers source components and build our products based on these demand forecasts. Changes to projected demand or in the subsequent sales mix of our products may result in us being committed to purchase excess inventory to satisfy

58

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

•Commitments to license content from content publishers under contractual arrangements. For additional information regarding licensed content commitments, see Note 12 to the consolidated financial statements in Item 8 of this Annual Report.

•Operating lease liabilities that are included in our consolidated balance sheets and liabilities related to the lease arrangements that have not yet commenced. For additional information regarding our lease liabilities, see Note 9 to the consolidated financial statements in Item 8 of this Annual Report.

The contractual commitments discussed above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included above.

In addition, we have $66.2 million of unrecognized income tax benefits, for which we are unable to reasonably predict the timing of settlement of liabilities. These income tax benefits are not recognized in our consolidated balance sheets as of December 31, 2021.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. 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.

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

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 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 SSP using information that may include market conditions and other observable inputs.

To the extent platform services are part of multiple element arrangements, revenue recognition of each performance obligation in the estimated transaction price of a contract is based on the expected value for which a significant reversal of revenue is not expected to occur. The estimate of the variable consideration is based on the assessment of historical, current, and forecasted performance noted and expected from the performance obligation.

For the sale of third-party goods and services, we evaluate whether we are the principal, and report revenue on a gross basis, or an agent, and report revenue on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.

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

We recognize, separately from goodwill, identifiable assets and liabilities acquired in a business combination at fair value on the date of acquisition. We use our best estimates and assumptions to accurately assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include, but are not limited to, future expected cash inflows and outflows, expected technology life cycle, attrition

59

rates of customers, and discount rates. We estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

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. During the measurement period, which may be up to one year from the acquisition date, we record adjustments to consideration transferred, and the assets and liabilities acquired, with the corresponding offset to goodwill to the extent we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of consideration transferred, and assets and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Impairment of Intangible Assets

We identify intangible assets acquired in a business combination and determine their fair value. The determination involves certain judgments and estimates. These judgments include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate discount rate. We amortize purchased-intangible assets on a straight-line basis over the estimated useful life of the assets. We review purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated, or that the carrying amount of the asset group to which it relates may not be recoverable. If such facts and circumstances indicate an asset group’s carrying amount may not be recoverable, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the asset group against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of these asset groups. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Allowances for Sales Returns and Sales Incentives

Accounts receivable are stated at invoice value less estimated allowances that include allowance for sales returns and sales incentives. We perform an ongoing analysis of various factors including our historical experience, promotional programs, claims to date, and other business factors to determine the allowances for sales returns and sales incentives. If our estimates regarding accounts receivable allowances differ from the actual results, the losses or gains could be material.

Provision for Income Taxes

We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We have established a full valuation allowance to offset U.S. and Netherlands net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets. Our valuation allowance is attributable to the uncertainty of realizing future tax benefits from U.S. and Netherlands net operating losses and other deferred tax assets. In order to assess the likelihood that we will recover our deferred tax assets against future sources of taxable income, we review the level of positive and negative evidence of future taxable income which is a critical estimate.

Recent Accounting Pronouncements

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