# ROKU, INC (ROKU) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ROKU, INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1428439/000142843923000007/roku-20221231.htm
Accession: 0001428439-23-000007
Filing date: 2023-02-16
Report date: 2022-12-31
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/
Previous year: /company/ROKU/mda/fy2021/ (FY 2021)
Next year: /company/ROKU/mda/fy2023/ (FY 2023)

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 2022 and 2021 and year-to-year comparisons between those years. Discussions of fiscal year 2020 and year-to-year comparisons between fiscal years 2021 and 2020 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, 2021 filed with the SEC on February 18, 2022.

Overview

Effective as of the fourth quarter of fiscal 2022, we reorganized our reportable segments to better align with management’s reporting of information reviewed by the Chief Operating Decision Maker (“CODM”) for each segment. We renamed our “player” segment to “devices” which now includes our licensing arrangements with service operators and licensed Roku TV partners in addition to sales of our streaming players, audio products, smart home products and Roku-branded TVs that will be designed, made, and sold by us in 2023. Our historical segment information is recast to conform to our new presentation in our financial statements and accompanying notes included in Item 8 of this Annual Report.

Our two reportable segments are the platform segment and the devices segment. Platform revenue is generated from the sale of digital advertising and related services including the demand-side platform and content distribution services such as subscription and transaction revenue shares, media and entertainment promotional spending, the sale of Premium Subscriptions, and the sale of branded channel buttons on remote controls.

Devices revenue is generated from the sale of streaming players, audio products, smart home products, and, beginning in 2023, Roku-branded TVs, and related accessories as well as from licensing arrangements with service operators and licensed Roku TV partners. We expect to continue to manage the average selling prices (“ASP”) of Roku streaming devices to increase our active accounts. We expect that the trade off from devices gross profit or loss to grow active accounts will result in increased platform revenue and platform gross profit.

Business Conditions and Macroeconomic Factors

Macroeconomic factors, such as increased inflation and interest rates, recessionary fears, financial and credit market fluctuations, changes in economic policy, the prolonged COVID-19 pandemic, global supply chain constraints, and geopolitical developments (such as the war in Ukraine), have had, and we believe will continue to have, an impact on our business and results of operations. For example, in 2022, some of our licensed Roku TV partners faced inventory challenges that negatively impacted their unit sales. In addition, some of our advertising verticals experienced supply chain disruptions that negatively impacted their product availability, which, together with inflation and other macroeconomic factors, have resulted in advertisers in a variety of industries reducing their overall advertising spend, which has adversely affected our platform revenue. We believe rising inflation and recessionary fears also have led to a reduction in consumer discretionary spending, which has driven a decrease in our devices revenue. The COVID-19 pandemic continues to affect our business, although to a lesser extent than in the past. The ongoing effects of the pandemic and associated economic conditions remain difficult to predict due to numerous uncertainties. We believe that the direct and indirect impacts of these business conditions and macroeconomic factors are difficult to isolate or quantify. See Item 1A, Risk Factors, and the Note Regarding Forward Looking Statements elsewhere in this Annual Report for additional details.

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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. All of our gross profit is generated from our platform segment.

Our gross profit was $1,441.1 million and $1,408.6 million for the years ended December 31, 2022 and 2021, respectively, reflecting an increase of 2%.

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. Additionally, users who only register an account for use of one of our smart home products are not included in our reported number of active accounts. 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 70.0 million and 60.1 million active accounts as of December 31, 2022 and 2021, respectively reflecting an increase of 16%.

Streaming Hours

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. Additionally, smart home products do not contribute to our streaming hours. 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 streaming device 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 Roku streaming devices include a Roku OS feature that is designed to identify when content has been continuously streaming on a channel for an extended period of time without user interaction. This feature, which we refer to as “Are you still watching,” periodically prompts the user to confirm that they are still watching the selected channel and closes the channel if the user does not respond affirmatively. We believe that the implementation of this feature across the Roku platform benefits us, our customers, channel partners, and advertisers. Some of our leading channel partners, including Netflix, also have implemented similar features within their channels. 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 87.4 billion and 73.2 billion hours during the years ended December 31, 2022 and 2021, respectively reflecting an increase of 19%.

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 $41.68 as of December 31, 2022 as compared to $40.67 as of December 31, 2021, reflecting an increase of 2%.

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Components of Results of Operations

Revenue

Platform Revenue

We generate platform revenue from digital advertising sales and related services including our demand-side ad platform and 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. 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.

Devices Revenue

We generate devices revenue from the sale of streaming players and other devices such as audio products, smart home products and accessories through consumer retail distribution channels and online retailers. Our devices revenue also includes licensing arrangements with service operators and licensed Roku TV partners. We generate most of our devices revenue in the United States. In our international markets, we primarily sell our devices through wholesale distributors which, in turn, re-sell to retailers.

Cost of Revenue

Cost of Revenue, Platform

Cost of revenue, platform primarily consists of costs associated with acquiring advertising inventory and amortization costs of content, both licensed and produced, and revenue share with content publishers. Cost of revenue, platform 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 customer support and platform operations personnel, and amortization of acquired developed technology.

Cost of Revenue, Devices

Cost of revenue, devices is comprised mostly of manufacturing costs payable to third party manufacturers for devices we sell which include streaming players, audio products and smart home products. Cost of revenue, devices also includes technology licenses or royalty fees on devices we sell or license, inbound and outbound freight, duty and logistics costs, third-party packaging, inventory provisions, and allocated overhead costs related to facilities, 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 devices 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 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 devices 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 and overhead expenses. We expect our general and administrative expenses to increase in absolute dollars due to the expansion of our business and related infrastructure.

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Other Income (Expense), Net

For the years ended December 31, 2022 and 2021, 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. For the year ended December 31, 2022, other income (expense), net also includes the change in the fair value of the strategic investment.

Income Tax Expense (Benefit)

Our income tax expense (benefit) consists primarily of income taxes in certain foreign jurisdictions where we conduct business and income taxes in the United States. We have a full valuation allowance for deferred tax assets, including net operating losses primarily for the U.S. and any jurisdiction where we do not expect to realize their benefits in the future. We expect to maintain this valuation allowance for the foreseeable future.

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.

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[[/GREPCENT_TABLE]]

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Comparison of Years Ended December 31, 2022 and 2021

Net Revenue

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Platform

Platform revenue increased by $446.5 million, or 20%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily attributable to higher advertising revenue which includes revenue from our demand-side ad platform as well as higher content distribution services, including higher revenue from media and entertainment promotional spending and Premium Subscriptions.

Devices

Devices revenue decreased by $84.6 million, or 17%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a decrease in both the volume of streaming players sold and average selling prices. During the year ended December 31, 2022, the volume of streaming players sold decreased by 14% and the average selling price of streaming players decreased by 5% as compared to the year ended December 31, 2021. We believe the decrease in the volume of streaming players sold is due to a reduction in consumer discretionary spend as a result of inflationary pressures. The decrease in the average selling price is due to higher promotions during the year ended December 31, 2022 as compared to the year ended December 31, 2021 where the volume was aided by the COVID-19 pandemic and required fewer promotions. The slowdown in growth also impacted the revenue from sale of audio products and revenue from licensing arrangements with service operators and licensed Roku TV partners which was slightly offset by revenue from sale of accessories and smart home products.

Cost of Revenue

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[[/GREPCENT_TABLE]]

Platform

The cost of revenue, platform increased by $361.2 million, or 44%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase is primarily driven by higher advertising inventory costs, higher content amortization costs, Premium Subscription costs, and credit card processing fees all totaling $293.4 million. Platform costs increased an additional $67.3 million due to higher personnel costs and increases in cloud services costs for supporting the platform.

Gross profit for the platform segment increased by $85.4 million, or 6%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by the overall growth in our platform revenue.

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Devices

The cost of revenue, devices decreased by $31.7 million, or 6%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease is primarily due to lower cost of revenue of $25.2 million due to a decrease in the volume of streaming players sold, a decrease in royalty expenses of $6.2 million and a decrease in freight costs of $4.1 million, offset by an increase in inventory reserve, purchase commitment losses and reduction in supplier rebates totaling $5.7 million.

Gross loss for the devices segment increased by $52.8 million, or 140%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. We believe the gross loss was driven by lower devices revenue due to overall decrease in consumer spending combined with disruptions in the global supply chain driving component prices higher in 2022 as compared to 2021. We expect to incur negative gross margin in the devices segment in the near future as we continue to insulate consumers from price increases and incur costs from expected promotional activities related to new product launches.

Operating Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and development

Research and development expenses increased by $327.3 million, or 71%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase is primarily due to increases in personnel-related costs of $241.1 million as a result of increased engineering headcount and related stock-based compensation, an increase in facilities costs of $52.7 million due to expansion of office spaces and IT infrastructure, an increase of $19.6 million related to restructuring charges, and higher consulting, professional services, and cloud services costs of $13.4 million.

Sales and marketing

Sales and marketing expenses increased by $382.8 million, or 84%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase is primarily due to increases in personnel-related costs of $172.7 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 $160.0 million mainly due to increases in marketing, retail and merchandising costs and general sales promotions, an increase in facilities costs of $20.9 million due to expansion of office spaces and IT infrastructure, an increase of $11.0 million in professional services and consulting fees, and an increase of $10.9 million related to restructuring charges.

General and administrative

General and administrative expenses increased by $88.4 million, or 34%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase is primarily due to increases in personnel-related costs of $72.5 million related to increased headcount and related stock-based compensation, an increase in facilities costs of $16.2 million due to expansion of office spaces and IT infrastructure, an increase of $7.6 million related to restructuring charges, a net increase of $4.6 million related to higher travel expenses, an increase in credit losses and higher general overhead, offset by a decrease of $11.2 million related to lower legal expenses, consulting, and professional services fees.

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Other Income (Expense), Net

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[[/GREPCENT_TABLE]]

Other income (expense), net

Total other income (expense), net, increased by $37.1 million, during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily driven by an increase in interest income of $31.8 million from higher interest rates on our cash balances during the period, foreign exchange net gain of $9.4 million from a stronger dollar on remeasurement of our foreign currency denominated assets and liabilities, offset by higher interest expense of $2.2 million.

Income Tax Expense (Benefit)

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[[/GREPCENT_TABLE]]

Income tax expense (benefit)

Income tax expense of $5.7 million for the year ended December 31, 2022 was driven by increases in foreign taxes and increases in U.S. taxes from the capitalization of research and development expenses effective January 1, 2022 as part of the Tax Cuts and Jobs Act of 2017.

Income tax benefit of $5.8 million for the year ended December 31, 2021 was 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, 2022, we had cash and cash equivalents of $1,962.0 million. Less than 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 devices 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 for our products, 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.

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 in the past, such as the acquisition of the Nielsen AVA business, the This Old House business, and content rights from Quibi in fiscal 2021, 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 and cash flow from operations 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 current macroeconomic environment. While the current macroeconomic environment has not severely impacted our liquidity and capital resources to date, it has contributed to disruption and volatility in local economies and in capital and credit markets, which could adversely affect our liquidity and capital resources in the future.

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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 Facility (described below) matures in February 2023, upon which we expect to pay off the remaining balance of $80.0 million. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to fixed payment obligations and also to restrictive covenants. Additionally, due to the current macroeconomic environment, we may be unable to obtain debt financing on terms that are acceptable to us.

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”).

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 will be repaid in full in 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, 2022, we were in compliance with all of the covenants of the Credit Agreement. See Note 11 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 $37.7 million and $38.0 million as of December 31, 2022 and 2021, respectively, against the Revolving Credit Facility. Upon maturity of the Credit Facility, we expect to roll over the outstanding letters of credit into a new, cash secured, bilateral facility. We expect this to require the use of approximately $44 million of existing cash and cash equivalents to secure the outstanding letters of credit.

Cash Flows

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

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Our operating activities provided cash of $11.8 million for the year ended December 31, 2022. Our net loss of $498.0 million for the year ended December 31, 2022 was adjusted by non-cash charges of $700.1 million comprised mainly of stock-based compensation, amortization of content assets, depreciation and amortization on property and equipment and intangible assets, amortization of operating right-of-use assets, and impairment of certain intangible technology assets adjusted by net gains on remeasurement of foreign currency denominated assets and liabilities.

The changes in our operating assets and liabilities used cash totaling $190.3 million mainly from an increase in content assets acquired and paid during the period, an increase in inventory on hand, an increase in prepaid expenses and accounts receivable balances offset by inflows from an increase in accounts payable and accrued liabilities and an increase in deferred revenue balances. These changes are mainly due to overall growth in the business combined with the timing of receipts from customers and payments to vendors.

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Cash Flows from Investing Activities

Our investing activities for the year ended December 31, 2022 included cash outflows of $201.7 million consisting of purchases of property and equipment and expenditures related to the expansion of our office facilities of $161.7 million and the purchase of a strategic investment of $40.0 million.

Cash Flows from Financing Activities

Our financing activities provided cash of $8.4 million for the year ended December 31, 2022. We received cash proceeds of $18.4 million from the exercise of employee stock options. These inflows were offset by $10.0 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, 2022 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 11 to the consolidated financial statements in Item 8 of this Annual Report.

•Commitments to purchase finished goods from our manufacturers and other inventory related items. Consistent with industry practices, we enter into firm, non-cancelable, and unconditional purchase commitments with our manufacturers to acquire products through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Our manufacturers source components and build our products based on these demand forecasts. Changes to projected demand or in the subsequent sales mix of our products may result in us being committed to purchase excess inventory to satisfy these commitments. For additional information regarding manufacturing purchase commitments, see Note 13 to the consolidated financial statements in Item 8 of this Annual Report.

•Commitments to license content from content publishers and produce content under contractual arrangements. For additional information regarding content commitments, see Note 13 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 10 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 $6.1 million of uncertain tax positions as of December 31, 2022. We adjust these positions when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. We are unable to accurately predict when these amounts will be realized or released. Although we believe we have adequately provided for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be materially different.

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 based on historical experience, current trends and other factors that we believe to be reasonable at the time our consolidated financial statements are prepared. We evaluate our estimates and assumptions on an ongoing basis. 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

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.

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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 devices 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 devices 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 devices. 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 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.

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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 the 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 the 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, 2022 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.