Filed Pursuant to Rule 424(b)(4)
Table of Contents

 


Filed Pursuant to Rule 424(b)(4)
Registration No. 333-220318

 

 


PROSPECTUS

15,668,000 Shares

 

 

LOGO

 

CLASS A COMMON STOCK

 

 

Roku, Inc. is offering 9,000,000 shares of its Class A common stock. The selling stockholders identified in this prospectus are offering an additional 6,668,000 shares of Class A common stock. We will not receive any proceeds from the sale of the shares being sold by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of Class A common stock.

 

 

We have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately 98.1% of the voting power of our outstanding capital stock immediately following this offering, with our directors, executive officers and principal stockholders representing approximately 97.1% of such voting power.

 

 

Our Class A common stock has been approved for listing on The NASDAQ Global Select Market under the trading symbol “ROKU.”

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 16.

 

 

PRICE $14.00 A SHARE

 

 

 

      

Price to

Public

    

Underwriting
Discounts

and
Commissions(1)

    

Proceeds to

Roku

    

Proceeds to
Selling
Stockholders

Per share

     $14.00      $0.98      $13.02      $13.02

Total

     $219,352,000.00      $15,354,640.00      $117,180,000.00      $86,817,360.00

 

(1) See “Underwriters” for a description of the compensation payable to the underwriters.

We and the selling stockholders have granted the underwriters an option to purchase up to an additional 2,350,200 shares of Class A common stock at the initial public offering price less underwriting discounts and commissions.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on October 2, 2017.

 

 

 

MORGAN STANLEY    CITIGROUP

 

ALLEN & COMPANY LLC    RBC CAPITAL MARKETS

 

NEEDHAM & COMPANY   OPPENHEIMER & CO.   WILLIAM BLAIR

September 27, 2017

 


 


Table of Contents

LOGO

 

We are in a golden age of TV. Our mission is to be the streaming platform that connects the entire TV ecosystem.


Table of Contents

LOGO

 

Roku Active accounts2 15.1M1 +43%

Roku Quarterly Streaming Hours3 3.5B1 + 60%

Roku ARPU4 $11.221 +35%

Annual Streaming Hours

0.9B 2012

1.7B 2013

3.2B 2014

5.5B 2015

9.4B 2016

11.9B5 TTM

Roku®

1 Fiscal Quarter ending June 30, 2017, and year-over-year comparison to the same period in the prior year.

2 Active Accounts represent distinct users who have streamed content on our platform in the last thirty days of the period.

3 Streaming hours are the aggregate amount of time users streamed content from channels on our platform in a given period.

4 Average Revenue per User (ARPU) represents platform revenue during the preceding four quarters divided by the average number of active accounts at the end of the period and the end of the prior four fiscal quarters.

5 Represents total streaming hours over the 12 months ended June 30, 2017.


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

   1

A Letter From Anthony Wood

   15

Risk Factors

   16

Special Note Regarding Forward-Looking Statements

   46

Industry and Market Data

   48

Use of Proceeds

   49

Dividend Policy

   49

Capitalization

   50

Dilution

   53

Selected Consolidated Financial and Other Data

   56

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

   60

Business

   91

Executive Compensation

   114

Certain Relationships and Related Person Transactions

   129

Principal and Selling Stockholders

   132

Description of Capital Stock

   136

Shares Eligible for Future Sale

   143

Material United States Federal Income Tax Consequences to Non-U.S. Holders of our Class A Common Stock

   146

Underwriters

   150

Legal Matters

   159

Experts

   159

Where Can You Find Additional Information

   159

Index to Financial Statements

   F-1
 

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we, the selling stockholders, nor any of the underwriters, have authorized anyone to provide you with any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters, take responsibility for, or can provide any assurance about the reliability of, any information that others may give you. We are not, the selling stockholders are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover of this prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since that date.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

Until October 22, 2017 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade shares of our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, especially the risks of investing in our Class A common stock discussed under the heading “Risk Factors,” and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Roku,” “the Company,” “we,” “us” and “our” refer to Roku, Inc. and its wholly-owned subsidiaries.

ROKU, INC.

Overview

We pioneered streaming to the TV. Roku connects users to the streaming content they love, enables content publishers to build and monetize large audiences, and provides advertisers with unique capabilities to engage consumers. We do this at scale today. As of June 30, 2017, we had 15.1 million active accounts. By comparison, the fourth largest multichannel video programming video distributor in the United States had approximately 13.3 million subscribers as of June 30, 2017. Our users streamed more than 6.7 billion hours on the Roku platform in the six months ended June 30, 2017, 62% growth from the six months ended June 30, 2016. TV streaming’s disruptive content distribution model is shifting billions of dollars of economic value. Roku is capitalizing on this large economic opportunity as a leading TV streaming platform for users, content publishers and advertisers.

Consumers win with TV streaming—they get a better user experience, more entertainment options and more control over what they spend on content. When users want to enjoy streaming entertainment, they start at the Roku home screen where we put users first by helping them find the content they want to watch. From our home screen, users can easily search, discover and access over 500,000 movies and TV episodes in the United States, as well as live sports, music, news and more. Users can also compare the price of content from various channels available on our platform and choose from ad-supported, subscription and transactional video on-demand content. The Roku platform delivers a significant expansion in consumer choice. Consumers can personalize their content selection with cable TV replacement offerings and other streaming services that suit their budgets and needs. Ad-supported channels available on the Roku platform include CBS News, Crackle, The CW and Vice; subscription channels include HBO Now, Hulu and Netflix, as well as traditional pay TV replacement services like DirecTV Now, Sling TV and Sony PlayStation Vue; and transactional channels include Amazon Video, Google Play and Vudu. Consumers are increasingly streaming ad-supported content. In the six months ended June 30, 2017, hours streamed on the Roku platform that included advertising grew to 2.9 billion hours, up 76% year-over-year from the six months ended June 30, 2016. Last year, searching for free content was the top reason users visited our website other than to manage their Roku accounts.

Roku operates the number one TV streaming platform in the United States as measured by total hours streamed, according to a survey conducted in the first quarter of 2017 by Kantar Millward Brown that we commissioned. Content publishers and advertisers win with Roku because our large and growing user base simplifies their access to the fragmented and complex over the top, or OTT, market and we provide them with direct to consumer engagement and monetization opportunities. We provide our content publishers with access to the most engaged OTT audience, as measured by average hours streamed, and the ability to monetize their content with advertising, subscription or transactional business models. Furthermore, as a pure play, neutral TV streaming platform, we are better able to serve content publishers compared to other platforms that have diversified business operations and competitive content offerings. Advertisers on our platform can reach our

 



 

1


Table of Contents

desirable OTT audience with ads that are more relevant, interactive and measurable than advertising delivered on traditional linear TV. As traditional TV audiences shrink, OTT audiences have become increasingly important to advertisers who must continue to reach large audiences. Our growth in active accounts and hours streamed has attracted more content publishers and advertisers to our TV streaming platform, creating a better user experience, which in turn attracts more users.

We have achieved significant growth. In the six months ended June 30, 2017, we generated revenue of $199.7 million, up 23% from $162.3 million in the six months ended July 2, 2016. In fiscal 2016, we generated revenue of $398.6 million, up 25% from $319.9 million in fiscal 2015. We generate player revenue from the sale of streaming players and platform revenue primarily from advertising and subscription revenue share on our platform. We earn platform revenue as users engage with content on our platform and we intend to continue to grow platform revenue by monetizing our TV streaming platform. In the six months ended June 30, 2017, player revenue represented 59% of total revenue and declined 2%, and platform revenue represented 41% of total revenue and grew 91% from the six months ended July 2, 2016. In fiscal 2016, player revenue represented 74% of total revenue and grew 9%, and platform revenue represented 26% of total revenue and grew 110% from fiscal 2015. In fiscal 2016 and the six months ended June 30, 2017, respectively, advertising revenue represented 63% and 67% of total platform revenue.

While we currently generate a majority of our revenue from sales of our streaming players, our business model is to grow gross profit by increasing the number of active accounts and growing average revenue per user, or ARPU, which we believe represents the inherent value of our business model. In the six months ended June 30, 2017, we generated gross profit of $76.5 million, up 52% from $50.3 million in the six months ended July 2, 2016. In fiscal 2016, we generated gross profit of $121.0 million, up 35% from $89.8 million in fiscal 2015. In the six months ended June 30, 2017, player gross profit represented 19% of total gross profit and declined 28%, and platform gross profit represented 81% of total gross profit and grew 104% from the six months ended July 2, 2016. In fiscal 2016, player gross profit represented 36% of total gross profit and declined 9%, and platform gross profit represented 64% of total gross profit and grew 87% from fiscal 2015. ARPU, which we define as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters, was $11.22 per active user in the period ended June 30, 2017 and $9.28 per active user in 2016, up 43% from $6.48 in 2015.

In the six months ended June 30, 2017, our net loss was $(24.2) million and our Adjusted EBITDA was $(14.0) million. In fiscal 2016 our net loss was $(42.8) million and our Adjusted EBITDA was $(29.9) million. See the section titled “Non-GAAP Financial Measures” below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable generally accepted accounting principle, or GAAP, financial measure and a discussion about the limitations of Adjusted EBITDA.

Our Market Opportunity

We believe all TV content will be available through streaming. The rapid adoption of TV streaming has disrupted the traditional linear TV distribution model, creating new options for consumers and new economic opportunities for content publishers and advertisers. OTT viewing has become mainstream in the United States. According to an April 2017 comScore report, 51 million U.S. homes have used OTT, and OTT has a 54% reach among homes with WiFi. Although traditional live TV still represents the majority of hours viewed by consumers, it declined year-over-year from 2015 to 2016 among adults by 1.5% on a Nielsen’s ratings basis, while streaming hours continue to grow both on an absolute basis, as well as on a percentage of total hours viewed basis. According to Activate, a high-tech, media and consumer retail consultancy firm in New York, it is projected that the average daily video consumption will increase to over 7 hours in 2018, 34% of which is attributed to digital video content, from 6.5 hours in 2013, 18% of which was attributed to digital video content. Further, the number of traditional pay TV subscribers continues to decline as consumers increasingly favor a

 



 

2


Table of Contents

streaming experience. As stated in a July 2017 eMarketer report, there were 25 million U.S. cord-cutter and cord-never households in 2016. We believe these consumer trends are creating significant opportunities for the TV streaming market.

When ad-supported TV is streamed, it creates an opportunity for content publishers and advertisers to use advanced digital advertising capabilities, such as one-to-one personalized delivery. We believe this presents a large market opportunity for streaming advertising to the TV. Consumers have watched TV content on an ad-supported basis since the 1940s. According to a March 2017 eMarketer report, the traditional TV advertising spend is large and continues to grow. In 2016, traditional TV advertising spend in the United States totaled $71 billion, and is expected to grow to approximately $80 billion in 2021. Simultaneously, total OTT revenue worldwide is expected to reach $60 billion by 2022, from $32 billion in 2016, with the greatest share of revenue in the United States, according to Ovum. While the majority of OTT revenue in the United States in 2016 was generated on a subscription or transactional basis according to Ovum, we believe there is a large opportunity for growth in the OTT advertising market given the long-standing consumer model of choosing ad-supported content, in addition to paid content.

How Our TV Streaming Platform Provides Value to Users, Content Publishers and Advertisers

Users. We provide a best-in-class TV experience for our users which drives our user growth and hours streamed. Key benefits we offer users include:

 

    Simple intuitive interface. Our user interface is easy to navigate and makes the search and discovery of relevant content a seamless part of the user experience. Our powerful cross-channel search capabilities make it easy to find TV episodes and movies across a wide variety of channels.

 

    Choice, control and value. From the Roku home page users can choose content on an ad-supported, subscription or transactional basis, and users are able to decide what content they want to pay for. We use simple and intuitive navigation to quickly bring users to the content they desire and compare price among available channels to select what they watch.

 

    Access to exceptional streamed content. Consumers are attracted to great content, and we believe that we offer unmatched breadth and depth of TV streaming content when compared to any other OTT platform.

Content Publishers. We provide a robust platform for content publishers to build and monetize OTT audiences. We offer over 5,000 streaming channels on our platform in the United States and over 3,000 internationally. Key benefits we offer content publishers include:

 

    Direct-to-consumer distribution. Through our platform, content publishers can directly reach large and relevant audiences, including consumers who no longer use traditional linear TV services. We are an increasingly valuable partner to content publishers who deliver content exclusively via streaming, as well as traditional TV content programmers and distributors.

 

    Ease of publishing and monetization. We make it easy for content publishers to launch streaming offerings on the Roku platform and build their audience through our open publishing platform. Our solution also allows content publishers to partner with Roku to sell advertising, and to designate Roku to monetize their content using our advertising sales or billing services.

 

    Unmatched opportunity to drive tune in. We enable content publishers to drive tune in, or increase the audience for their content, through a range of advertising capabilities on our platform. Content publishers are featured prominently throughout a user’s experience on the Roku platform, such as channel promotions during the new user setup process and through ads in our user interface, including on the Roku home screen. We employ a wide variety of data-driven capabilities to help content publishers broaden their user base, drive engagement, and retain existing users.

 



 

3


Table of Contents

Advertisers. Our TV streaming platform provides a differentiated advertising opportunity. We serve advertisers across multiple industry verticals and in 2016, we worked with seven of the ten largest advertisers in the United States as ranked by Ad Age. Some of the key benefits we offer advertisers include:

 

    Access to a hard to reach audience. With audiences consuming more TV via OTT, cord-cutters and cord-nevers are on the rise and traditional linear TV ratings are in decline, advertisers are increasingly focused on OTT platforms to reach the population of consumers who are watching less traditional linear TV. We aggregate this audience on our platform for advertisers.

 

    Best of TV and digital advertising delivery. Video advertising on our platform offers the best of both traditional TV and advanced digital advertising. We offer the large format sight, sound and motion of traditional TV advertising and the relevance, interactivity and measurability of digital advertising—all within the context of what the user is watching. Our advertising capabilities offer many relevance and measurement advantages when compared to traditional TV advertising, because ads are delivered in real-time based on personalized user insights.

 

    Large scale. Our platform offers advertisers access to the most engaged OTT audience, as measured by hours streamed, and we believe it offers the largest number of ad-supported TV streaming channels. Advertisers benefit because they can reach a large audience across a variety of video genres and audience attributes. We have 15.1 million active accounts streaming an average of approximately three hours per day across thousands of channels as of the second quarter of 2017. Given our significant scale, the age, gender and geographic demographics of our U.S. user base are approximately the same as the overall U.S. population, which we believe makes us attractive to a wide variety of advertisers.

Our Products

Advertising. Our advertising products enable advertisers to serve relevant ads to our users and measure return on investment. Our primary advertising products include:

 

    Video ads. Our ad-supported content publishers use video ads to monetize our audiences and we also use video ads to monetize our platform. Video ads are sold as 15-second or 30-second spots inserted before a program starts, or during a program break, within channels on the Roku platform where we have video inventory access. One of the ways we secure video ad insertion rights from content publishers is via our distribution deals with those publishers. In addition, many publishers also authorize us to fill their own unsold inventory. For many small and medium publishers on our platform, Roku sells all or a majority of the ads on their channels.

 

    Interactive video ads. We offer advertisers the ability to make their TV advertising interactive with customized clickable overlays that invite viewers to engage more intimately with brands, by watching additional videos, obtaining offer details, getting a coupon code via text or finding the nearest retailer to buy a product.

 

    Audience development promotions. We utilize a variety of ad placements, particularly native display ads, on the Roku home screen and screen saver, to promote content publishers and their services to our users. We help them to drive channel downloads and traffic to their channels, and to drive subscriptions or movie and TV show consumption. Given our strategic role as a user’s TV streaming home screen, we are increasingly able to predict a user’s likelihood of taking action in response to an ad we serve. We also sell branded buttons on our remote controls which are reserved for content publishers who are in more prominent placement on the remote to drive incremental usage and reduce friction by allowing the user to launch straight to the channel.

 

    Brand sponsorships. We support a variety of promotional opportunities for advertisers, such as sponsored themes to take over our home screen and content sponsorships to give users the opportunity to experience a free movie or show (e.g. “Family movie night brought to you by…”).

 



 

4


Table of Contents

Roku TVs. Roku TVs are manufactured and sold by our TV brand licensees, integrate our Roku Operating System, or Roku OS, and leverage our smart TV hardware reference design. Current licensee brands include Element, Hisense, Hitachi, Insignia, RCA, Sharp and TCL. Roku TVs are available in sizes ranging from 24” to 65” at leading retailers in the United States and Canada. In 2017, we expect over 150 models to be available to consumers in North America, up from approximately 100 in 2016, featuring a wide range of prices as well as picture and display capabilities. We believe that approximately one in five smart TVs sold in the United States and Canada in the first half of 2017 were Roku TVs.

Streaming Players. We offer a popular, industry-leading line of streaming players for sale under the Roku brand in the United States, Canada, the United Kingdom, France and the Republic of Ireland, that allow users to access our TV streaming platform. All players run on the Roku OS and stream content via built-in Ethernet or Wi-Fi capability, depending on the model.

Competitive Strengths

 

    Large and engaged user base. Millions of users come to the Roku home screen to stream billions of hours of content per year. According to an analysis of Nielsen data from their national panel, Roku players accounted for approximately 48% of TV-connected digital streaming device usage (as compared among the top four brands) in the U.S. for the month of December 2016. Roku provides a best-in-class user experience by removing the complexity and driving the proliferation of OTT TV streaming. As we grow our large and engaged user base, we become an increasingly important partner for our content publishers and advertiser partners. As we attract more partners, our user experience improves, attracting more users to our platform in a virtuous cycle.

 

    Roku OS purpose built for TV streaming. Our proprietary Roku OS is purpose built to manage TV streaming and integrates our streaming software, APIs, user interface, advertising technology stack, billing services and data insight tools. We continue to invest significantly in the Roku OS, and we believe it is difficult to replicate.

 

    Powerful data analytics engine. Users have a direct relationship with Roku, and we provide their TV streaming home screen. This provides us with detailed insights about our users and their behavior on our platform, such as what channels they install and what content they search for. We collect and process 18 terabytes of uncompressed data per day, and we are able to develop actionable insights from the data on our platform to improve our user experience, as well as to enable our content publishers and advertisers to find relevant users and engage them.

 

    Neutral OTT platform. We are a neutral OTT platform, making us an attractive partner. We do not focus on competing with content publishers on our platform, but instead, look to partner with publishers to build their audiences and maximize our mutual success on the platform. As a result, unlike other TV streaming platforms, we have not developed any original programming and do not have our own subscription service or video on-demand store. In addition, we do not compete directly with our retailers or our TV brand partners. We also endeavor to build trust with our users by providing unbiased search results and recommendations.

 

    Ability to power TV streaming at low cost. The Roku OS is designed for exceptional performance using relatively low cost hardware. This approach enables us to drive account growth by offering Roku players at great value to consumers. We also believe we will be able to continue to drive active account growth from our TV brand partnerships. The low bill of materials required to run the Roku OS enables our TV brand license partners to build smart TVs using our operating system that are more competitively priced. As smart TVs take over most of the overall TV installed base over time, we believe we can power a very large portion of TVs based on our unique solution for TV brands.

 

   

Ability to rapidly deploy IP-based solution. There were over 918 million pay TV subscribers worldwide in 2016, according to Ovum. According to Kagan, a media research group within S&P Global Market intelligence, it is estimated, that 273 million cable boxes were shipped worldwide in

 



 

5


Table of Contents
 

2016. Given the technology benefits of delivering content via internet instead of cable or satellite, many service operators are adding Internet protocol based, or IP-based, solutions for their customers. The Roku Powered program enables service operators to rapidly deploy an IP-based solution to deliver content to their subscribers.

Growth Strategy

We are capitalizing on the large economic opportunity for a leading TV streaming platform for users, content publishers and advertisers. Our key growth strategies include:

 

    Grow active accounts. We intend to increase user adoption of the Roku platform by continuing to improve our user experience, to increase the depth and breadth of our content offering, and to enhance our TV streaming platform. We plan to continue to attract more users with a highly compelling TV streaming value proposition that allows users to access the largest collection of channel applications, pay only for the channels that they want, utilize the best search and discovery tools, and navigate a simple and easy to use user interface. We also plan to increase active accounts by continuing to expand our retail presence and grow our Roku OS licensing program for TV brands and service operators.

 

    Grow hours streamed. We intend to increase user engagement and hours streamed by offering more content that is easier to find and discover on our platform. By increasing the available content on our platform and making it easily accessible, we have diversified the type of content streamed. To improve content discovery, we introduced “More Ways to Watch” on Roku TVs. This feature uses automatic content recognition technology to suggest relevant content options to users.

 

    Grow ARPU. We expect to continue to grow ARPU by growing hours streamed and our monetization capabilities. We have experienced the fastest growth in hours streamed from our advertising-based content as measured by the number of hours streamed in the six months ended June 30, 2016, as compared to the six months ended June 30, 2017. We are increasing the monetization of these hours by expanding our advertising capabilities both on and off the Roku platform.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

    We have incurred operating losses in the past, expect to incur operating losses in the future and may never achieve or maintain profitability.

 

    TV streaming is highly competitive and many companies, including large technology companies, TV brands and service operators, are actively focusing on this industry. If we fail to differentiate ourselves and compete successfully with these companies it will be difficult for us to attract users and our business will be harmed.

 

    We may not be successful in our efforts to further monetize our streaming platform, which may harm our business.

 

    We depend on a small number of content publishers for a majority of our streaming hours and if we fail to monetize these relationships, directly or indirectly, our business could be harmed.

 

    We operate in an evolving industry, which makes it difficult to evaluate our business and prospects. If TV streaming develops more slowly than we expect, our operating results and growth prospects could be harmed. In addition, our future growth depends on the growth of TV streaming advertising.

 



 

6


Table of Contents
    If we are unable to maintain an adequate supply of ad inventory on our platform, our business may be harmed.

 

    Our players and Roku TVs must operate with various offerings, technologies and systems from our content publishers that we do not control. If Roku devices do not operate effectively with those offerings, technologies and systems, our business may be harmed.

 

    Changes in consumer viewing habits could harm our business.

 

    If we fail to obtain and maintain popular content, we may fail to retain existing users and attract new users.

 

    If the advertisements on our platform are not relevant or not engaging to our users, our growth in active accounts and hours streamed may be adversely impacted.

If we are unable to adequately address these and other risks we face, our business may be harmed.

In addition, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company,” whichever is earlier. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have not elected to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

Corporate Information

We originally organized as a limited liability company in Delaware in October 2002 and subsequently incorporated in Delaware in February 2008. Our principal executive offices are located at 150 Winchester Circle, Los Gatos, California 95032, and our telephone number is (408) 556-9040. Our website address is www.roku.com. Information contained on or accessible through our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

Roku, the Roku logo and other trade names, trademarks or service marks of Roku appearing in this prospectus are the property of Roku. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 



 

7


Table of Contents

THE OFFERING

 

Class A common stock offered by us

   9,000,000 shares

Class A common stock offered by the selling stockholders

  


6,668,000 shares

Class A common stock to be outstanding after this offering

  


15,668,000 shares

Class B common stock to be outstanding after this offering

  


79,080,495 shares

Total Class A and Class B common stock to be outstanding after this offering

  


94,748,495 shares

Option to purchase additional shares of Class A common stock offered by us

  


1,350,000 shares

Option to purchase additional shares of Class A common stock offered by the selling stockholders

  


1,000,200 shares

Voting rights

   We have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion rights. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to 10 votes per share, on all matters that are subject to stockholder vote. Following this offering, each share of Class B common stock may be converted into one share of Class A common stock at the option of the holder thereof, and will be converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions. See the section titled “Description of Capital Stock” for additional information.

Use of proceeds

   We estimate that the net proceeds from this offering to us will be approximately $113.2 million (or approximately $130.8 million if the underwriters’ option to purchase additional shares of our Class A common stock from us is exercised in full), based on the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of Class A common stock in this offering by the selling stockholders.
   The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. We intend to use the net proceeds from this offering

 



 

8


Table of Contents
   primarily for general corporate purposes, including working capital, research and development, business development, sales and marketing activities and capital expenditures. We may also use a portion of the net proceeds from this offering for acquisitions of, or investments in, technologies or businesses that complement our business, although we have no commitments or agreements to enter into such acquisitions or investments. See “Use of Proceeds” for additional information.

Risk factors

   See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

Nasdaq symbol

   “ROKU”

The number of shares of Class A and Class B common stock to be outstanding after this offering is based on no shares of our Class A common stock and 85,748,495 shares of our Class B common stock (including preferred stock on an as-converted basis) outstanding as of June 30, 2017, and excludes:

 

    24,559,747 shares of Class B common stock issuable upon the exercise of outstanding stock options as of June 30, 2017 with a weighted-average exercise price of $3.88 per share and 3,219,857 shares of Class B common stock issuable upon the exercise of outstanding stock options which were granted in August 2017 with an exercise price of $8.82 per share;

 

    2,225,966 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2017 with a weighted-average exercise price of $2.70 per share, which are expected to remain outstanding after the closing of this offering;

 

    357,283 shares of our Class B common stock issued in July 2017 upon the automatic net exercise of a warrant to purchase 375,000 shares of our Class B common stock outstanding as of June 30, 2017;

 

    4,256,161 additional shares of Class B common stock reserved for future issuance under our 2008 Equity Incentive Plan as of June 30, 2017 (without giving effect to options granted in August 2017), which shares ceased to be available for issuance at the time our 2017 Equity Incentive Plan became effective in connection with this offering;

 

    12,000,000 shares of Class A common stock reserved for future issuance under our 2017 Equity Incentive Plan, which became effective upon the execution of the underwriting agreement for this offering, as well as (i) any automatic increases in the number of shares of Class A common stock reserved for future issuance under this plan and (ii) upon the expiration or termination prior to exercise of any shares of Class B common stock issuable upon the exercise of stock options outstanding under our 2008 Equity Incentive Plan, an equal number of shares of Class A common stock, such number of shares not to exceed 28,000,000;

 

    3,000,000 shares of Class A common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of Class A common stock reserved for future issuance under this plan, which became effective upon the execution of the underwriting agreement for this offering; and

 

    108,332 shares of Class B common stock issued in September 2017 in connection with an acquisition.

 



 

9


Table of Contents

In addition, unless we specifically state otherwise, all information in this prospectus assumes:

 

    a 1-for-6 reverse stock split of our common stock and preferred stock effected on September 15, 2017;

 

    the reclassification of all 4,904,357 outstanding shares of our common stock into an equal number of shares of our Class B common stock and the authorization of our Class A common stock;

 

    that our amended and restated certificate of incorporation, which we will file in connection with the closing of this offering, and our amended and restated bylaws adopted in connection with this offering are effective;

 

    the conversion of all 80,844,138 outstanding shares of our preferred stock into an equal number of shares of Class B common stock immediately upon the closing of this offering;

 

    the conversion of all of our outstanding warrants to purchase shares of preferred stock into warrants to purchase an equal number of shares of our Class B common stock immediately upon the closing of this offering;

 

    the conversion of 6,668,000 shares of our Class B common stock into an equivalent number of shares of Class A common stock upon the sale of such shares by the selling stockholders;

 

    no exercise of outstanding options or warrants; and

 

    no exercise by the underwriters of their option to purchase up to an additional 2,350,200 shares of Class A common stock.

 



 

10


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. We derived the consolidated statements of operations data for the fiscal years ended December 26, 2015 and December 31, 2016 from our audited financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the six months ended July 2, 2016 and June 30, 2017 and the consolidated balance sheet data as of June 30, 2017 from our unaudited consolidated interim financial statements and related notes included elsewhere in this prospectus. Our unaudited consolidated interim financial statements were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and results for the six months ended June 30, 2017 are not necessarily indicative of results to be expected for the full fiscal year.

Prior to 2017, our fiscal year was the 52- or 53-week period that ends on the last Saturday of December. Our fiscal years 2015 and 2016 ended on December 26, 2015 and December 31, 2016, respectively. In 2017, we changed our fiscal year-end to match the calendar year-end. Fiscal year 2015 spanned 52 weeks and fiscal year 2016 spanned 53 weeks. The two fiscal quarters ended July 2, 2016 and June 30, 2017 spanned 27 weeks and 26 weeks, respectively, and references to the six months ended July 2, 2016 refer to the two fiscal quarters ended July 2, 2016, unless otherwise indicated.

You should read this data together with our consolidated financial statements and related notes, “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

                                                                                           
     Fiscal Year Ended     Six Months Ended  
     December 26,     December 31,     July 2,     June 30,  
     2015     2016     2016     2017  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

        

Net revenue:

        

Player

   $ 269,977     $ 293,929     $ 119,116     $ 117,329  

Platform

     49,880       104,720       43,140       82,391  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     319,857       398,649       162,256       199,720  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Player(1)

     221,416       249,821       99,375       103,122  

Platform(1)

     8,663       27,783       12,549       20,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     230,079       277,604       111,924       123,243  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

        

Player

     48,561       44,108       19,741       14,207  

Platform

     41,217       76,937       30,591       62,270  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     89,778       121,045       50,332       76,477  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development(1)

     50,469       76,177       38,471       48,118  

Sales and marketing(1)

     45,153       52,888       26,245       28,722  

General and administrative(1)

     31,708       35,341       18,255       20,855  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     127,330       164,406       82,971       97,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (37,552     (43,361     (32,639     (21,218
  

 

 

   

 

 

   

 

 

   

 

 

 

 



 

11


Table of Contents
                                                                                           
     Fiscal Year Ended     Six Months Ended  
     December 26,     December 31,     July 2,     June 30,  
     2015     2016     2016     2017  
     (in thousands, except share and per share data)  

Other income (expense), net:

        

Interest expense

   $ (696   $ 146     $ (131   $ (471

Change in fair value of preferred stock warrant liability

     (1,768     888       (394     (2,651

Other income (expense), net

     (448     (220     (25     211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (40,464     (42,547     (33,189     (24,129

Income tax expense

     147       211       53       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (40,611   $ (42,758   $ (33,242   $ (24,215
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

   $ (10.08   $ (9.01   $ (7.08   $ (4.98
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted(2)

     4,030,579       4,745,943       4,696,170       4,866,028  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders-basic and diluted (unaudited)(2)

     $ (0.51     $ (0.25
    

 

 

     

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share attributable to common stockholders-basic and diluted (unaudited)(2)

       85,590,081         85,710,166  
    

 

 

     

 

 

 

Other Financial and Operational Data (unaudited):

        

Adjusted EBITDA (in thousands)(3)

   $ (29,713   $ (29,853   $ (25,784   $ (14,045

Hours Streamed (in millions)(4)

     5,498       9,351       4,172       6,742  

Active Accounts (in thousands)(5)

     9,179       13,383       10,552       15,116  

ARPU for the preceding four fiscal quarters (in dollars)(6)

   $ 6.48     $ 9.28     $ 8.32     $ 11.22  

 

(1) Stock-based compensation was allocated as follows:

 

                                                                                           
     Fiscal Year Ended      Six Months Ended  
     December 26,      December 31,     

July 2,

    

June 30,

 
     2015      2016      2016      2017  
     (in thousands)  

Cost of player revenue

   $ 90      $ 136      $ 58      $ 74  

Cost of platform revenue

     54        224        102        40  

Research and development

     1,685        2,766        1,273        1,881  

Sales and marketing

     1,678        2,292        1,157        1,291  

General and administrative

     1,777        2,788        1,415        1,307  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 5,284      $ 8,206      $ 4,005      $ 4,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 11 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of basic and diluted net loss per common share and pro forma net loss per common share.
(3)

We define Adjusted EBITDA as net loss, plus: other (income) expense, net, stock-based compensation, depreciation and amortization, and income tax expense. See the section titled “Non-GAAP Financial Measures” below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable

 



 

12


Table of Contents
  generally accepted accounting principle, or GAAP, financial measure and a discussion about the limitations of Adjusted EBITDA.
(4) We define hours streamed as the aggregate amount of time users streamed content from channels on our platform in a given period, including both channels installed from our channel stores and non-certified channels. Non-certified channels are channels that are accessed by users utilizing a code provided to the user by the content publisher and are not found in the Roku Channel Store. In each of the periods presented, hours streamed from non-certified channels comprised less than 8% of total hours streamed. Hours streamed are reported on a calendar basis.
(5) We define active accounts as the number of distinct user accounts that have streamed any content on our platform in the last 30 days of the period. Active accounts are reported on a calendar basis.
(6) We define average revenue per user as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters.

 

     As of June 30, 2017  
     Actual     Pro Forma(1)      Pro Forma
As Adjusted(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash

   $ 70,169     $ 70,169      $ 183,349  

Total assets

     184,996       184,996        298,176  

Long term debt

     22,811       22,811        22,811  

Preferred stock warrant liability

     14,673               

Total liabilities

     185,166       170,493        170,493  

Convertible preferred stock

     213,180               

Total stockholders’ (deficit) equity

     (213,350     14,503        127,683  

 

(1) The pro forma column reflects the conversion of all outstanding shares of convertible preferred stock into 80,844,138 shares of Class B common stock and the reclassification of the preferred stock warrant liability to additional paid-in capital immediately upon the closing of this offering.
(2) The pro forma as adjusted column further reflects the receipt of $113.2 million in net proceeds from our sale of 9,000,000 shares of Class A common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus Adjusted EBITDA, a non-GAAP financial measure. We have provided below a reconciliation between Adjusted EBITDA and net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this prospectus because it is a key measure we use to evaluate our operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP.

 



 

13


Table of Contents

Some limitations of Adjusted EBITDA are:

 

    Adjusted EBITDA does not include other (income) expense, net, which primarily includes changes in the fair value of warrants to purchase convertible preferred stock and interest expense;

 

    Adjusted EBITDA does not include the impact of stock-based compensation;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures;

 

    Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

    Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:

 

     Fiscal Year Ended     Six Months Ended  
     December 26,
2015
    December 31,
2016
    July 2,
2016
    June 30,
2017
 
     (in thousands)  

Reconciliation of Net Loss to Adjusted EBITDA:

        

Net loss

   $ (40,611   $ (42,758   $ (33,242   $ (24,215

Other (income) expense, net

     2,912       (814     550       2,911  

Stock-based compensation

     5,284       8,206       4,005       4,593  

Depreciation and amortization

     2,555       5,302       2,850       2,580  

Income tax expense

     147       211       53       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (29,713   $ (29,853   $ (25,784   $ (14,045
  

 

 

   

 

 

   

 

 

   

 

 

 

 



 

14


Table of Contents

A LETTER FROM ANTHONY WOOD

Do you watch TV?

Most people do, and there are probably many shows that you absolutely love to watch and can’t wait to see. We are in a golden age of TV, with more creators developing more amazing content than ever before.

At the same time, you probably also say “but I am watching TV differently than I used to.” Except for sports and a few other live events, you are probably watching a lot less live TV, and with increasing frequency streaming content to your TV.

The massive TV ecosystem is in the midst of a complete re-platforming, with streaming (aka OTT) at the heart of the industry’s transformation. Companies like Netflix and Hulu—and there are hundreds more—are delighting consumers by making streamed content available on the consumer’s terms, when and how you want it, paying only for what you want.

Over time, I believe that streaming will allow consumers on-demand access to every movie and TV show ever made as well as brand new categories of short form videos and specialty content. As this essentially infinite amount of content is unleashed and made available from many sources, a new challenge emerges:

 

    How will you find the best content, the kind of content you stay up all night watching?

 

    In a world where TV distribution is changing so dramatically, how will content publishers get paid so they can keep creating shows?

 

    How will advertisers connect with the massive, yet fragmented audience in an OTT world?

That’s where Roku comes in.

Our mission is to be the TV streaming platform that connects the entire TV ecosystem. We connect consumers with the content they love. We help content publishers find their audience and make money. We are pushing TV advertising out of the 1940s—when Bulova watches launched the first TV ad—and into the data-driven, machine learning, era of relevant and interactive TV ads. We partner with TV brands and service operators so they can thrive in this rapidly changing ad world.

I believe that just like mainframe operating systems didn’t transition to PCs, and just like PC operating systems didn’t make the transition to phones (is your phone powered by Windows?), TVs will be powered by a purpose-built operating system optimized for streaming.

Roku shipped the first Netflix player. Since then, we have expanded and delivered our platform through millions of little boxes and sticks that plug into the TV, and increasingly our OS is directly powering the TV itself.

Since starting Roku 15 years ago, we have been leading the streaming revolution. I believe the TV ecosystem is at a tipping point, and I couldn’t be more excited about what the next 15 years of transformation and disruption will bring.

It’s a great time to be in the TV streaming business!

Anthony

 

15


Table of Contents

RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our Class A common stock. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, user growth and engagement, financial condition, results of operations, revenue, gross profit and future prospects. In such event, the trading price of our Class A common stock could decline and you might lose all or part of your investment.

Risks Related to Our Business and Industry

We have incurred operating losses in the past, expect to incur operating losses in the future and may never achieve or maintain profitability.

We began operations in 2002 and for all of our history we have experienced net losses and negative cash flows from operations. As of June 30, 2017, we had an accumulated deficit of $244.0 million and for the six months ended June 30, 2017, we experienced a net loss of $(24.2) million. We expect our operating expenses to increase in the future as we expand our operations. Furthermore, as a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. If our revenue and gross profit do not grow at a greater rate than our operating expenses, we will not be able to achieve and maintain profitability. We expect to incur significant losses in the future for a number of reasons, including without limitation the other risks and uncertainties described herein. Additionally, we may encounter unforeseen operating or legal expenses, difficulties, complications, delays and other factors that may result in losses in future periods. If our expenses exceed our revenue, we may never achieve or maintain profitability and our business may be harmed.

TV streaming is highly competitive and many companies, including large technology companies, TV brands and service operators, are actively focusing on this industry. If we fail to differentiate ourselves and compete successfully with these companies, it will be difficult for us to attract users and our business will be harmed.

TV streaming is increasingly competitive and global. Our success depends in part on attracting and retaining users on, and effective monetization of, our TV streaming platform. To attract and retain users, we need to be able to respond efficiently to changes in consumer tastes and preferences and continue to increase the type and number of content offerings. Effective monetization requires us to continue to update the features and functionality of our streaming platform for users, content publishers and advertisers. We must also effectively support the most popular sources of streaming content, such as Netflix, Amazon.com, Inc. and Hulu, including rapid responses to actual and anticipated market trends in the U.S. TV streaming industry.

Companies such as Amazon.com, Apple Inc. and Google Inc. offer TV streaming products that compete with our streaming players. Amazon.com has also recently launched a co-branded TV that natively runs its TV streaming platform that competes with Roku TV. In addition, Google licenses its operating system software for integration into smart TVs and service provider set top boxes. These companies have the financial resources to subsidize the cost of their streaming devices in order to promote their other products and services making it harder for us to acquire new users and increase hours streamed. These companies could also implement standards or technology that are not compatible with our products or that provide a better streaming experience on competitive products. These companies also promote their brands through traditional forms of advertising, such as TV commercials, as well as Internet advertising or website product placement, and have greater resources than us to devote to such efforts.

In addition, many TV brands, such as LG, Samsung Electronics Co., Ltd. and VIZIO, Inc., offer their own TV streaming solutions within their TVs. Other devices, such as Microsoft’s Xbox and Sony’s PlayStation game

 

16


Table of Contents

consoles and many DVD and Blu-ray players, also incorporate TV streaming functionality. Similarly, some service operators, such as Comcast and Cablevision, offer TV streaming applications as part of their cable service plans and can leverage their existing consumer bases, installation networks, broadband delivery networks and name recognition to gain traction in the TV streaming market. If users of TV streaming content prefer these alternative products to Roku streaming players and Roku TVs, we may not able to achieve our expected growth in player revenue or gross profit.

We expect competition in TV streaming from the large technology companies and service operators described above, as well as new and growing companies, to increase in the future. This increased competition could result in pricing pressure, lower revenue and gross profit or the failure of our players, Roku TV and our platform to gain or maintain broad market acceptance. To remain competitive and maintain our position as a leading TV streaming provider we need to continuously invest in product development, marketing, service and support and device distribution infrastructure. We may not have sufficient resources to continue to make the investments needed to maintain our competitive position. In addition, most of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than us, which provide them with advantages in developing, marketing or servicing new products and offerings. As a result, they may be able to respond more quickly to market demand, devote greater resources to the development, promotion and sales of their products or the distribution of their content, and influence market acceptance of their products better than we can. These competitors may also be able to adapt more quickly to new or emerging technologies or standards and may be able to deliver products and services at a lower cost. Increased competition could reduce our market share, revenue and operating margins, increase our operating costs, harm our competitive position and otherwise harm our business.

We may not be successful in our efforts to further monetize our streaming platform, which may harm our business.

In addition to generating player revenue, our business model depends on our ability to generate platform revenue from content publishers and advertisers. We generate platform revenue from advertising campaigns and on a transactional basis from new subscription purchases and content transactions that occur on our platform. As such, we are seeking to expand our user base and increase the number of hours that are streamed across our platform in an effort to create additional platform revenue opportunities and grow our ARPU, which we define as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters. The total number of hours streamed, however, does not correlate with platform revenue or ARPU on a period-by-period basis, because we do not monetize every hour streamed on our platform. As our user base grows and as we increase the amount of content offered and streamed across our platform, we must effectively monetize our expanding user base and streaming activity.

Our ability to deliver more relevant advertisements to our users and to increase our platform’s value to advertisers depends on the collection of user engagement data, which may be restricted or prevented by a number of factors. Users may decide to opt out or restrict our ability to collect personal viewing data or to provide them with more relevant advertisements. Content publishers may also refuse to allow us to collect data regarding user engagement or refuse to implement mechanisms we request to ensure compliance with our legal obligations or technical requirements. For example, we are not able to fully utilize program level viewing data from many of our most popular channels to improve the relevancy of advertisements provided to our users. Other channels available on our platform, such as Amazon, Hulu and YouTube, are focused on increasing user engagement and time spent within their channel by allowing them to purchase additional content and streaming services within their channels. In addition, we do not currently monetize content provided on non-certified channels on our platform. If our users spend most of their time within particular channels where we have limited or no ability to place advertisements or leverage user information, or users opt out from our ability to collect data for use in providing more relevant advertisements, then we may not be able to achieve our expected growth in platform revenue or gross profit. If we are unable to further monetize our platform, our business may be harmed.

 

17


Table of Contents

To date, the majority of the hours streamed on our platform have consisted of subscription video on demand content; however, in order to materially increase the monetization of our platform through the sale of advertising-supported video, we will need our users to stream significantly more ad-supported content. Furthermore, our efforts to monetize our platform through ad-supported content is still developing, and may not grow as we expect. Accordingly, there can be no assurance that we will be successful in monetizing our platform through the sale of advertising-supported video.

We depend on a small number of content publishers for a majority of our streaming hours, and if we fail to monetize these relationships, directly or indirectly, our business could be harmed.

Historically, a small number of content publishers have accounted for a significant portion of the content streamed across our platform and the terms and conditions of our relationships with content publishers vary. For fiscal 2016 and the six months ended June 30, 2017, content streamed from our top five streaming channels accounted for approximately 70% and 69%, respectively, of the total hours of content streamed across our platform, with Netflix alone accounting for approximately one-third of all hours streamed in each period. However, although Netflix is the largest provider of content across our platform, revenue generated from Netflix was not material to our overall revenue during the six months ended June 30, 2017, and we do not expect revenue from Netflix to be material to our operating results for the foreseeable future. In addition, our agreements with content publishers generally have a term of one to three years and can be terminated before the end of the term by the content publisher under certain circumstances, such as if we materially breach the agreement, become insolvent, enter bankruptcy, commit fraud or fail to adhere to the content publisher’s security requirements. Further, we receive no revenue from YouTube, the most viewed ad-supported channel by hours streamed on our platform for fiscal 2016 and the six months ended June 30, 2017. If we fail to maintain our relationships with the content publishers that account for a significant amount of the content streamed by our users or if these content publishers face problems in delivering their content across our platform, we may lose users and our business may be harmed.

We operate in an evolving industry, which makes it difficult to evaluate our business and prospects. If TV streaming develops more slowly than we expect, our operating results and growth prospects could be harmed. In addition, our future growth depends on the growth of TV streaming advertising.

TV streaming is relatively new and rapidly evolving industry, making our business and prospects difficult to evaluate. The growth and profitability of this industry and the level of demand and market acceptance for our products and TV platform are subject to a high degree of uncertainty. We believe that the continued growth of streaming as an entertainment alternative will depend on the availability and growth of cost-effective broadband Internet access, the quality of broadband content delivery, the quality and reliability of new devices and technology, the cost for users relative to other sources of content, as well as the quality and breadth of content that is delivered across streaming platforms. These technologies, products and content offerings continue to emerge and evolve. Users, content publishers or advertisers may find TV streaming platforms to be less attractive than traditional TV, which would harm our business. In addition, many advertisers continue to devote a substantial portion of their advertising budgets to traditional advertising, such as TV, radio and print. The future growth of our business depends on the growth of TV streaming advertising, and on advertisers increasing spend on such advertising. We cannot be certain that they will do so. If advertisers do not perceive meaningful benefits of TV streaming advertising, then this market may develop more slowly than we expect, which could adversely impact our operating results and our ability to grow our business.

If we are unable to maintain an adequate supply of video ad inventory on our platform, our business may be harmed.

We may fail to attract content publishers that generate sufficient ad-supported content hours on our platform and continue to grow our video ad inventory. Our business model depends on our ability to grow video ad inventory on our platform and sell it to advertisers. We grow ad inventory by adding and retaining content publishers on our

 

18


Table of Contents

platform with ad-supported channels that we can monetize. In addition, we do not have access to all video ad inventory on our platform, and we may not secure access in the future. The amount, quality and cost of inventory available to us can change at any time. If we are unable to grow and maintain a sufficient supply of quality video advertising inventory at reasonable costs to keep up with demand, our business may be harmed.

We operate in a highly competitive industry and we compete for advertising revenue with other Internet streaming platforms and services, as well as traditional media, such as radio, broadcast, cable and satellite TV and satellite and Internet radio. These competitors offer content and other advertising mediums that may be more attractive to advertisers than our TV streaming platform. These competitors are often very large and have more advertising experience and financial resources than we do, which may adversely affect our ability to compete for advertisers and may result in lower revenue and gross profit from advertising. If we are unable to increase our advertising revenue by, among other things, continuing to improve our platform’s data capabilities to further optimize and measure advertisers’ campaigns, increase our advertising inventory and expand our advertising sales team and programmatic capabilities, our business and our growth prospects may be harmed. We may not be able to compete effectively or adapt to any such changes or trends, which would harm our ability to grow our advertising revenue and harm our business.

Our players and Roku TVs must operate with various offerings, technologies and systems from our content publishers that we do not control. If Roku devices do not operate effectively with those offerings, technologies and systems, our business may be harmed.

Our Roku OS is designed for performance using relatively low cost hardware, which enables us to drive user growth with our players and Roku TVs offered at a low cost to consumers. However, our hardware must be interoperable with all channels and other offerings, technologies and systems from our content publishers, including virtual multi-channel video programming distributors such as Sling TV. We have no control over these offerings, technologies and systems beyond our channel certification requirements, and if our players don’t provide our users with a high quality experience on those offerings on a cost effective basis or if changes are made to those offerings that are not compatible with our players, we may be unable to increase user growth and content hours streamed, we may be required to increase our hardware costs and our business will be harmed. We plan to continue to introduce new products regularly and we have experienced that it takes time to optimize such products to function well with these offerings, technologies and systems. In addition, many of our largest content publishers have the right to test and certify our new products before we can publish their channels on new products. These certification processes can be time consuming and introduce third party dependencies into our product release cycles. If content publishers do not certify new products on a timely basis, or require us to make changes in order to obtain certifications, our product release plans may be adversely impacted. To continue to grow our active accounts and user engagement, we will need to prioritize development of our products to work better with new offerings, technologies and systems. If we are unable to maintain consistent operability of Roku devices that is on parity with or better than other platforms, our business could be harmed. In addition, any future changes to offerings, technologies and systems from our content publishers such as virtual service operators may impact the accessibility, speed, functionality, and other performance aspects of our products, which issues are likely to occur in the future from time to time. We may not successfully develop products that operate effectively with these offerings, technologies or systems. If it becomes more difficult for our users to access and use these offerings, technologies or systems, our business could be harmed.

Changes in consumer viewing habits could harm our business.

The manner in which consumers access streaming content is changing rapidly. As the technological infrastructure for Internet access continues to improve and evolve, consumers will be presented with more opportunities to access video, music and games on-demand with interactive capabilities. Time spent on mobile devices is growing rapidly, in particular by young adults streaming video content, including popular streaming channels like Netflix and YouTube, as well as content from cable or satellite providers available live or

 

19


Table of Contents

on-demand on mobile devices. In addition, personal computers, smart TVs, DVD players, Blu-ray players, gaming consoles and cable set top boxes allow users to access streaming entertainment content. If other streaming or technology providers are able to respond and take advantage of changes in consumer viewing habits and technologies better than us, our business could be harmed.

New entrants may enter the TV streaming market with unique service offerings or approaches to providing video. In addition, our competitors may enter into business combinations or alliances that strengthen their competitive positions. If new technologies render the TV streaming market obsolete or we are unable to successfully compete with current and new competitors and technologies, our business will be harmed, and we may not be able to increase or maintain our market share and revenue.

If we fail to obtain or maintain popular content, we may fail to retain existing users and attract new users.

We have invested a significant amount of time to cultivate relationships with our content publishers; however, such relationships may not continue to grow or yield further financial results. We currently have over 5,000 streaming channels on our platform in the United States and over 3,000 channels in our international markets, and we must continuously maintain existing relationships and identify and establish new relationships with content publishers to provide popular content. In order to remain competitive, we must consistently meet user demand for popular streaming channels and content; particularly as we launch new players or enter new markets, including international markets. If we are not successful in helping our content publishers launch and maintain streaming channels that attract and retain a significant number of users on our platform or if we are not able to do so in a cost-effective manner, our business will be harmed. Our ability to successfully help content publishers maintain and expand their channel offerings on a cost-effective basis largely depends on our ability to:

 

    effectively market new streaming channels and enhancements to our existing streaming channels;

 

    minimize launch delays of new and updated streaming channels; and

 

    minimize platform downtime and other technical difficulties.

If we fail to help our content publishers maintain and expand their channel offerings our business may be harmed.

If the advertisements on our platform are not relevant or not engaging to our users, our growth in active accounts and hours streamed may be adversely impacted.

We have made, and are continuing to make, investments to enable advertisers to deliver relevant advertising content to users on our platform. Existing and prospective Roku advertisers may not be successful in serving ads that lead to and maintain user engagement. Those ads may seem irrelevant, repetitive or overly targeted and intrusive. We are continuously seeking to balance the objectives of our users and advertisers with our desire to provide an optimal user experience, but we may not be successful in achieving a balance that continues to attract and retain users and advertisers. If we do not introduce relevant advertisements or such advertisements are overly intrusive and impede the use of our TV streaming platform, our users may stop using our platform which will harm our business.

The Roku Channel may not generate sufficient advertising revenues.

In September 2017, we launched “The Roku Channel,” an ad-supported streaming channel on the Roku platform that gives our users free access to a collection of films and other content. We will not receive subscriptions or other fees from users that access content on The Roku Channel. We have incurred, and will continue to incur, costs and expenses in connection with the launch and operation of The Roku Channel, which we plan to monetize through advertising. If our users do not stream the content we make available on The Roku Channel, we will not have the opportunity to monetize The Roku Channel through advertising. Furthermore, if

 

20


Table of Contents

the advertisements on The Roku Channel are not relevant to our users or such advertisements are overly intrusive and impede our users’ enjoyment of the content we make available, our users may not stream content and view advertisements on The Roku Channel, and The Roku Channel may not generate sufficient advertising revenues to be cost effective for us to operate.

Our growth will depend in part upon our ability to develop relationships with TV brands and, to a lesser extent, service operators.

We developed, and intend to continue to develop, relationships with TV brands and service operators in both the United States and international markets. Our licensing arrangements are complex and time-consuming to negotiate and complete. Our potential partners include TV brands, cable and satellite companies and telecommunication providers. Under these license arrangements, we generally have limited control over the amount and timing of resources these entities dedicate to the relationship. If our TV brand or service operator partners fail to meet their forecasts for distributing licensed devices, our business may be harmed.

We license our Roku OS to certain TV brands to manufacture co-branded smart TVs, or Roku TVs. The primary economic benefits that we derive from these license arrangements have been and will likely continue to be indirect, primarily from growing our active accounts and increasing hours streamed. We have not received, nor do we expect to receive significant license revenue from these arrangements in the near term, but we expect to incur expenses in connection with these commercial agreements. If these arrangements do not result in increased users, hours streamed or we are unable to increase the revenue under these arrangements, our business may be harmed. The loss of a relationship with a TV brand or service operator could harm our results of operations, damage our reputation, increase pricing and promotional pressures from other partners and distribution channels or increase our marketing costs. If we are not successful in maintaining existing and creating new relationships with TV brands and, to a lesser extent, service operators, or if we encounter technological, content licensing or other impediments to our development of these relationships, our ability to grow our business could be adversely impacted.

If our users sign up for offerings and services outside of our platform or though other channels on our platform, our business may be harmed.

We earn revenue by acquiring subscribers for certain of our content publishers activated on or through our platform. If users do not use our platform for these purchases or subscriptions for any reason, and instead pay for services directly with content publishers or by other means that we do not receive attribution for, our business may be harmed. In addition, certain channels available on our platform allow users to purchase additional streaming services from within their channels. The revenues we earn from these transactions are generally not equivalent to the revenues we earn from activations on or through our platform that we receive full attribution credit for. Accordingly, if users activate their subscriptions for content or services through other channels on our platform, our business may be harmed.

If we were to lose the services of our Chief Executive Officer or other members of our senior management team, we may not be able to execute our business strategy.

Our success depends in a large part upon the continued service of key members of our senior management team. In particular, our founder, President and Chief Executive Officer, Anthony Wood, is critical to our overall management, as well as the continued development of our devices and the Roku platform, our culture and our strategic direction. All of our executive officers are at will employees, and we do not maintain any key person life insurance policies. The loss of any member of our senior management team could harm our business.

If we are unable to attract and retain highly qualified employees, we may not be able to continue to grow our business.

Our ability to compete and grow depends in large part on the efforts and talents of our employees. Our employees, particularly engineers and other product developers, are in high demand, and we devote significant

 

21


Table of Contents

resources to identifying, hiring, training, successfully integrating and retaining these employees. As competition with other companies’ increases, we may incur significant expenses in attracting and retaining high quality engineers and other employees. The loss of employees or the inability to hire additional skilled employees as necessary to support the rapid growth of our business and the scale of our operations could result in significant disruptions to our business, and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business.

We believe a critical component to our success and our ability to retain our best people is our culture. As we continue to grow and develop a public company infrastructure, we may find it difficult to maintain our entrepreneurial, execution-focused culture. In addition, many of our employees, may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may reduce their motivation to continue to work for us. Moreover, this offering could create disparities in wealth among our employees, which may harm our culture and relations among employees and our business.

Most of our agreements with content publishers are not long term. Any disruption in the renewal of such agreements may result in the removal of certain content from our platform and may harm our active account growth and engagement.

We enter into agreements with all our content publishers, which have varying expiration dates; typically over one to three years. Upon expiration of these agreements, we are required to re-negotiate and renew these agreements in order to continue providing offerings from these content publishers on our platform. For example, since 2008, we have offered Netflix on our platform pursuant to a series of multi-year contracts. We are in the final year of our current application distribution agreement with Netflix and we anticipate that this contract will be extended or renewed prior to its expiration. We may not be able to reach a satisfactory agreement before our existing agreements have expired. If we are unable to renew such agreements on a timely basis, we may be required to temporarily or permanently remove certain content from our platform. The loss of such content from our platform for any period of time may harm our business.

If our content publishers do not continue to develop channels for our platform and participate in new features that we may introduce from time to time, our business may be harmed.

As our platform and products evolve, we will continue to introduce new features, which may or may not be attractive to our content publishers or meet their requirements. For example, some content publishers have elected not to participate in our cross-channel search feature, our integrated advertising framework, known as RAF, or have imposed limits on our data gathering for usage within their channels. In addition, our platform utilizes our proprietary Brightscript scripting language in order to allow our content publishers to develop and create channels on our platform. If we introduce new features or utilize a new scripting language in the future, such a change may not comply with our content publisher’s certification requirements. In addition, our content publishers may find other languages, such as HTML5, more attractive to develop for and shift their resources to developing their channels on other platforms. If content publishers do not find our platform simple and attractive to develop channels for, do not value and participate in all of the features and functionality that our platform offers, or determine that our software developer kit or new features of our platform do not meet their certification requirements, our business may be harmed.

Our quarterly operating results may be volatile and are difficult to predict, and our stock price may decline if we fail to meet the expectations of securities analysts or investors.

Our revenue, gross profit and other operating results could vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance due to a variety of factors, including many factors that are outside of our control. Factors that may contribute to the variability of our operating results and cause the market price of our Class A common stock to fluctuate include:

 

    the entrance of new competitors or competitive products in our market, whether by established or new companies;

 

22


Table of Contents
    our ability to retain and grow our active account base and increase engagement among new and existing users;

 

    our revenue mix, which drives gross profit;

 

    seasonal or other shifts in advertising revenue or player sales;

 

    the timing of the launch of new or updated products, streaming channels or features;

 

    the addition or loss of popular content;

 

    the ability of retailers to anticipate consumer demand;

 

    an increase in the manufacturing or component costs of our players or the manufacturing or component costs of our TV brand licensees’ for Roku TVs; and

 

    an increase in costs associated with protecting our intellectual property, defending against third-party intellectual property infringement allegations or procuring rights to third-party intellectual property.

Our gross profit margins vary across our devices and platform offerings. Player revenue has a lower gross margin compared to platform revenue derived through our arrangements with advertising, content distribution, billing and licensing activities. Gross margins on our players vary across player models and can change over time as a result of product transitions, pricing and configuration changes, component costs, player returns and other cost fluctuations. In addition, our gross margin and operating margin percentages, as well as overall profitability, may be adversely impacted as a result of a shift in device, geographic or sales channel mix, component cost increases, price competition, or the introduction of new players, including those that have higher cost structures with flat or reduced pricing. We have in the past and may in the future strategically reduce our player gross margin in an effort to increase our active accounts and grow our gross profit. As a result, our player revenue may not increase as rapidly as it has historically, or at all, and, unless we are able to adequately increase our platform revenue and grow our active accounts, we may be unable to grow gross profit and our business will be harmed. If a reduction in gross margin does not result in an increase in our active accounts and gross profit, our financial results may suffer and our business may be harmed.

Our revenue and gross profit are subject to seasonality and if our sales during the holiday season fall below our expectations, our business may be harmed.

Seasonal consumer shopping patterns significantly affect our business. Specifically, our revenue and gross profit are traditionally strongest in the fourth quarter of each fiscal year due to higher consumer purchases and increased advertising during holiday periods. Fourth quarter revenue comprised 40% and 37% of our fiscal 2015 and 2016 total net revenue, respectively, and fourth quarter gross profit comprised 39% and 37% of our fiscal 2015 and 2016 gross profit, respectively. Furthermore, a significant percentage of our player sales through retailers in the fourth quarter are pursuant to committed sales agreements with retailers for which we recognize significant discounts in the average selling prices in the third quarter in an effort to grow our active accounts, which will reduce our player gross margin.

Given the seasonal nature of our player sales, accurate forecasting is critical to our operations. We anticipate that this seasonal impact on revenue and gross profit is likely to continue and any shortfall in expected fourth quarter revenue, due to macroeconomic conditions, a decline in the effectiveness of our promotional activities, actions by our competitors or disruptions in our supply or distribution chain, or for any other reason, would cause our results of operations to suffer significantly. For example, delays or disruptions at U.S. ports of entry could adversely affect our or our licensees’ ability to timely deliver players and co-branded Roku TVs to retailers during the holiday season. A substantial portion of our expenses are personnel related and include salaries, stock-based compensation and benefits that are not seasonal in nature. Accordingly, in the event of a revenue shortfall, we would be unable to mitigate the negative impact on margins, at least in the short term, and our business would be harmed.

 

23


Table of Contents

We and our TV brand partners depend on our retail sales channels to effectively market and sell our players and Roku TVs, and if we or our partners fail to maintain and expand effective retail sales channels we could experience lower player or Roku TV sales.

To continue to acquire new active accounts, we must maintain and expand our retail sales channels. The majority of our players and Roku TVs are sold through traditional brick and mortar retailers, such as Best Buy, Costco, Target and Walmart, including their online sales platforms, and online retailers such as Amazon.com. To a lesser extent, we sell players directly through our website and internationally through distributors. In 2015 and 2016, Amazon.com, Best Buy and Walmart each accounted for more than 10% of our player revenue and are expected to each account for more than 10% of our player revenue in fiscal 2017. These three retailers collectively accounted for 57% and 61% of our player revenue in fiscal 2015 and 2016, respectively. These retailers and our international distributors also sell products offered by our competitors. We have no minimum purchase commitments or long-term contracts with any of these retailers or distributors. If one or several retailers or distributors were to discontinue selling our players or Roku TVs, or choose not to prominently display those devices in their stores or on their websites, the volume of Roku devices sold could decrease, which would harm our business. Traditional retailers have limited shelf and end cap space in their stores and limited promotional budgets, and online retailers have limited prime website product placement space. Competition is intense for these resources, and a competitor with more extensive product lines and stronger brand identity, such as Apple or Google, possesses greater bargaining power with retailers. In addition, one of our online retailers, Amazon.com, sells its own competitive TV streaming products and is able to market and promote these products more prominently on its website, and could refuse to offer our devices. Any reduction in our ability to place and promote our devices, or increased competition for available shelf or website placement, would require us to increase our marketing expenditures simply to maintain our product visibility, which may harm our business. In particular, the availability of product placement during peak retail periods, such as the holiday season, is critical to our revenue growth, and if we are unable to effectively sell our devices during these periods, our business would be harmed.

If our efforts to build a strong brand and maintain customer satisfaction and loyalty are not successful, we may not be able to attract or retain users, and our business may be harmed.

Building and maintaining a strong brand is important to attract and retain users, as potential users have a number of TV streaming choices. Successfully building a brand is a time consuming and comprehensive endeavor, and can be positively and negatively impacted by any number of factors. Some of these factors, such as the quality or pricing of our players or our customer service, are within our control. Other factors, such as the quality and reliability of Roku TVs and the quality of the content that our content publishers provide, may be out of our control, yet users may nonetheless attribute those factors to us. Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. Many of our competitors are larger companies and promote their brands through traditional forms of advertising, such as print media and TV commercials, and have substantial resources to devote to such efforts. Our competitors may also have greater resources to utilize Internet advertising or website product placement more effectively than we can. If we are unable to execute on building a strong brand, it may be difficult to differentiate our business and platform from our competitors in the marketplace, therefore our ability to attract and retain users may be adversely affected and our business may be harmed.

We must successfully manage device introductions and transitions in order to remain competitive.

We must continually develop new and improved devices that meet changing consumer demands. Moreover, the introduction of a new device is a complex task, involving significant expenditures in research and development, promotion and sales channel development, and management of existing inventories to reduce the cost associated with returns and slow moving inventory. As new devices are introduced, we have to monitor closely the inventory at our contract manufacturers, and phase out the manufacture of prior versions in a controlled manner. For example, in 2017 we participated in the introduction of dozens of new models of Roku TVs with TCL that incorporate new high-dynamic range technologies and high-end Roku TVs with Hisense that

 

24


Table of Contents

feature new 4K technologies and larger screen sizes. Whether users will broadly adopt new devices is not certain. Our future success will depend on our ability to develop new and competitively priced devices and add new desirable content and features to our platform. Moreover, we must introduce new devices in a timely and cost-effective manner, and we must secure production orders for those devices from our contract manufacturers and component suppliers. The development of new devices is a highly complex process, and while our research and development efforts are aimed at solving increasingly complex problems, we do not expect that all of our projects will be successful. The successful development and introduction of new devices depends on a number of factors, including the following:

 

    the accuracy of our forecasts for market requirements beyond near term visibility;

 

    our ability to anticipate and react to new technologies and evolving consumer trends;

 

    our development, licensing or acquisition of new technologies;

 

    our timely completion of new designs and development;

 

    the ability of our contract manufacturers to cost-effectively manufacture our new devices;

 

    the availability of materials and key components used in the manufacture of our new devices; and

 

    our ability to attract and retain world-class research and development personnel.

If any of these or other factors becomes problematic, we may not be able to develop and introduce new devices in a timely or cost-effective manner, and our business may be harmed.

We do not have manufacturing capabilities and depend upon a small number of contract manufacturers, and our operations could be disrupted if we encounter problems with these contract manufacturers.

We do not have any internal manufacturing capabilities and primarily rely upon two contract manufacturers, Hon Hai Precision Industry Co. Ltd., or Foxconn, and Lite-On Technology Corporation, or Lite-On, to build our devices. Our contract manufacturers are vulnerable to capacity constraints and reduced component availability, and our control over delivery schedules, manufacturing yields and costs, particularly when components are in short supply or when we introduce a new device or feature, is limited. In addition, we have limited control over Foxconn’s and Lite-On’s quality systems and controls, and therefore must rely on Foxconn and Lite-On to manufacture our devices to our quality and performance standards and specifications. Delays, component shortages and other manufacturing and supply problems could impair the retail distribution of our devices and ultimately our brand. Furthermore, any adverse change in our contract manufacturers’ financial or business condition could disrupt our ability to supply devices to our retailers and distributors.

Our contracts with Foxconn and Lite-On do not obligate these manufacturers to supply our devices in any specific quantity or at any specific price. In the event either Foxconn or Lite-On is unable to fulfill our production requirements in a timely manner or decide to terminate their relationship with us, our order fulfillment may be delayed and we would have to identify, select and qualify acceptable alternative contract manufacturers. Alternative contract manufacturers may not be available to us when needed or may not be in a position to satisfy our production requirements at commercially reasonable prices or to our quality and performance standards. Any significant interruption in manufacturing at Foxconn or Lite-On would require us to reduce our supply of devices to our retailers and distributors, which in turn would reduce our revenue. In addition, the Foxconn and Lite-On facilities are located in the People’s Republic of China and may be subject to political, economic, social and legal uncertainties that may harm our relationships with these parties. We believe that the international location of these facilities increases supply risk, including the risk of supply interruptions. Furthermore, any manufacturing issues affecting the quality of our products, including Roku TVs or players, could harm our business.

If Foxconn or Lite-On fail for any reason to continue manufacturing our devices in required volumes and at high quality levels, or at all, we would have to identify, select and qualify acceptable alternative contract

 

25


Table of Contents

manufacturers. Alternative contract manufacturers may not be available to us when needed, or may not be in a position to satisfy our production requirements at commercially reasonable prices or to our quality and performance standards. Any significant interruption in manufacturing at Foxconn or Lite-On would require us to reduce our supply of devices to our retailers and distributors, which in turn would reduce our revenue and user growth.

If we fail to accurately forecast our manufacturing requirements and manage our inventory with our contract manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue.

We bear supply risk under our contract manufacturing arrangements with Foxconn and Lite-On. Lead times for the materials and components that Foxconn and Lite-On order on our behalf through different component suppliers vary significantly and depend on numerous factors, including the specific supplier, contract terms and market demand for a component at a given time. Lead times for certain key materials and components incorporated into our devices are currently lengthy, requiring our contract manufacturers to order materials and components several months in advance. If we overestimate our production requirements, our contract manufacturers may purchase excess components and build excess inventory. If our contract manufacturers, at our request, purchase excess components that are unique to our players or build excess players, we could be required to pay for these excess components or players. In the past, we have agreed to reimburse our contract manufacturers for purchased components that were not used as a result of our decision to discontinue players or the use of particular components. If we incur costs to cover excess supply commitments, this would harm our business.

Conversely, if we underestimate our player requirements, our contract manufacturers may have inadequate component inventory, which could interrupt the manufacturing of our players and result in delays or cancellation of orders from retailers and distributors. In addition, from time to time we have experienced unanticipated increases in demand that resulted in the need to ship devices via air freight, which is more expensive than ocean freight, and adversely affected our device gross margin during such periods of high demand, for example, during end-of-year holidays. If we fail to accurately forecast our manufacturing requirements, our business may be harmed.

Our players incorporate key components from sole source suppliers and if our contract manufacturers are unable to source these components on a timely basis, due to fabrication capacity issues or other material supply constraints, we will not be able to deliver our players to our retailers and distributors.

We depend on sole source suppliers for key components in our players. Our players utilize specific system on chip, or SoC, WiFi silicon products and WiFi front-end modules from various manufacturers, depending on the player, for which we do not have a second source. Although this approach allows us to maximize player performance on lower cost hardware, reduce engineering qualification costs and develop stronger relationships with our strategic suppliers, this also creates supply chain risk. These sole source suppliers could be constrained by fabrication capacity issues or material supply issues, stop producing such components, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors or other companies. Neither we nor our contract manufacturers have long-term supply agreements with these suppliers. Instead, our contract manufacturers typically purchase the components required to manufacture our devices on a purchase order basis. As a result, most of these suppliers can stop selling to us at any time, requiring us to find another source, or can raise their prices, which could impact our gross margins. Any such interruption or delay may force us to seek similar components from alternative sources, which may not be available. Switching from a sole source supplier would require that we redesign our players to accommodate new components, and would require us to re-qualify our players with regulatory bodies, such as the Federal Communications Commission, or FCC, which would be costly and time-consuming.

Our reliance on sole source suppliers involves a number of additional risks, including risks related to:

 

    supplier capacity constraints;

 

26


Table of Contents
    price increases;

 

    timely delivery;

 

    component quality; and

 

    delays in, or the inability to execute on, a supplier roadmap for components and technologies.

Any interruption in the supply of sole source components for our players could adversely affect our ability to meet scheduled player deliveries to our retailers and distributors, result in lost sales and higher expenses and harm our business.

If we have difficulty managing our growth in operating expenses, our business could be harmed.

We have experienced significant growth in research and development, sales and marketing, support services and operations in recent years and expect to continue to expand these activities. For example, our research and development expenses increased from $38.5 million for the six months ended July 2, 2016 to $48.1 million for the six months ended June 30, 2017. In addition, in January 2016, we moved our corporate headquarters and had commenced activities to sublet our old office space. We have secured sublessors for a substantial portion of our old office space, but continue to incur rent expense on the remaining space. If we are unable to find sublessors for all or a substantial portion of this remaining space, our quarterly financial performance will be impacted as a result of this additional expense through 2020. Our historical growth has placed, and expected future growth will continue to place, significant demands on our management, as well as our financial and operational resources, to:

 

    manage a larger organization;

 

    hire more employees, including engineers with relevant skills and experience;

 

    expand our manufacturing and distribution capacity;

 

    increase our sales and marketing efforts;

 

    broaden our customer support capabilities;

 

    support a larger number of TV brand and service operators;

 

    implement appropriate operational and financial systems;

 

    expand internationally; and

 

    maintain effective financial disclosure controls and procedures.

If we fail to manage our growth effectively, we may not be able to execute our business strategies and our business will be harmed.

We may be unable to successfully expand our international operations. In addition, our international expansion plans, if implemented, will subject us to a variety of risks that may harm our business.

We currently generate almost all of our revenue in the United States and have limited experience marketing, selling and supporting our players and monetizing our platform outside the United States. In addition, we have limited experience managing the administrative aspects of a global organization. While we intend to continue to explore opportunities to expand our business in international markets in which we see compelling opportunities to build relationships with users, advertisers and retail distributors, TV brands and service operators, we may not be able to create or maintain international market demand for our devices and TV streaming platform. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. We may also be subject to new statutory restrictions and risks. For example, there may be no foreign equivalents to the Digital Millennium Copyright Act to shield us from liability in connection with infringing materials that content publishers may make available on our platform. In addition, we may be required in international

 

27


Table of Contents

jurisdictions to offer longer warranty periods than we currently offer in the United States. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and financial condition may be harmed.

In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:

 

    differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions;

 

    greater difficulty supporting and localizing our devices and platform;

 

    our ability to deliver or provide access to popular streaming channels to users in certain international markets;

 

    different or unique competitive pressures as a result of, among other things, the presence of local consumer electronics companies and the greater availability of free content on over-the-air channels in certain countries;

 

    challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, compensation and benefits and compliance programs;

 

    differing legal and court systems, including limited or unfavorable intellectual property protection;

 

    risk of change in international political or economic conditions;

 

    restrictions on the repatriation of earnings; and

 

    working capital constraints.

If we experience higher device returns than we expect and are unable to resell such returned devices as refurbished devices our business could be harmed.

We offer customers who purchase devices through our website 30 days to return such devices. We also generally honor the return policies of our retail and distribution partners, who typically allow customers to return devices, even with open packaging within certain time periods that may exceed 30 days. We generally resell any returned devices as refurbished devices. In the event we decide to permanently reduce the retail prices of our devices, we provide price protection to certain distribution partners for the devices they hold in inventory at the time of the price drop. To the extent we experience a greater number of returns than we expect, are unable to resell returned devices as refurbished devices or are required to provide price protection in amounts greater than we expect, our business could be harmed.

We are subject to payment-related risks and, if our advertisers or advertising agencies do not pay or dispute their invoices, our business may be harmed.

Many of our contracts with advertising agencies provide that if the advertiser does not pay the agency, the agency is not liable to us, and we must seek payment solely from the advertiser, a type of arrangement called sequential liability. Contracting with these agencies, which in some cases have or may develop higher-risk credit profiles, may subject us to greater credit risk than if we were to contract directly with advertisers. This credit risk may vary depending on the nature of an advertising agency’s aggregated advertiser base. We may also be involved in disputes with agencies and their advertisers over the operation of our platform or the terms of our agreements. If we are unable to collect or make adjustments to bills, we could incur write-offs for bad debt, which could have a material adverse effect on our results of operations for the periods in which the write-offs occur. In the future, bad debt may exceed reserves for such contingencies and our bad debt exposure may increase over time. Any increase in write-offs for bad debt could have a materially negative effect on our business, financial condition and operating results. If we are not paid by our advertisers or advertising agencies on time or at all, our business may be harmed.

 

28


Table of Contents

Any significant disruption in our computer systems or those of third parties we utilize in our operations could result in a loss or degradation of service on our platform and could harm our business.

We rely on the expertise of our engineering and software development teams for the performance and operation of our platform and computer systems. Service interruptions, errors in our software or the unavailability of computer systems used in our operations could diminish the overall attractiveness of our devices and platform to existing and potential users. We utilize computer systems located either in our facilities or those of third-party server hosting providers and third-party Internet-based or cloud computing services. Although we generally enter into service level agreements with these parties, we exercise no control over their operations, which makes us vulnerable to any errors, interruptions or delays that they may experience. In the future, we may transition additional features of our services from our managed hosting systems to cloud computing services, which may require significant expenditures and engineering resources. If we are unable to manage a transition effectively, we may experience operational delays and inefficiencies until the transition is complete. Upon the expiration or termination of any of our agreements with third-party vendors, we may not be able to replace their services in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete. In addition, fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems and hardware or cause them to fail completely. As we do not maintain entirely redundant systems, a disrupting event could result in prolonged downtime of our operations and could adversely affect our business. Any disruption in the services provided by these vendors could have adverse impacts on our business reputation, customer relations and operating results.

Our servers and those of the third parties we use in our operations may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions and delays in platform availability and operations, as well as the loss, misuse or theft of personal and identifying information of our users. We also rely on third-party contractors to collect, process, transmit and store personal information of our users, including our users’ credit card data. We maintain limited insurance policies to cover losses relating to our systems. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users. Because of our prominence in the TV streaming industry, we believe we may be a particularly attractive target for hackers. Our platform also incorporates licensed software from third-parties, including open source software, and we may also be vulnerable to attacks that focus on such third-party software. Any attempts by hackers to disrupt our platform, our devices, website, computer systems or our mobile apps, if successful, could harm our business, be expensive to remedy and damage our reputation. Efforts to prevent hackers from entering our computer systems or exploiting vulnerabilities in our devices are expensive to implement and may not be effective in detecting or preventing intrusion or vulnerabilities. Such unauthorized access to users’ data could damage our reputation and our business and could expose us of the risk to contractual damages, litigation and regulatory fines and penalties that could harm our business.

If any aspect of our computer systems fails, it may lead to downtime or slow processing time, either of which may harm the experience of users. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. We expect to continue to make significant investments in our technology infrastructure to maintain and improve the user experience and platform performance. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasingly complex services and functions, increasing numbers of users, and actual and anticipated changes in technology, our business may be harmed.

Changes in how network operators manage data that travel across their networks could harm our business.

Our business relies upon the ability of consumers to access high-quality streaming content through the Internet. As a result, the growth of our business depends on our users’ ability to obtain low-cost, high-speed

 

29


Table of Contents

access to the Internet, which relies in part on the network operators’ continuing willingness to upgrade and maintain their equipment as needed to sustain a robust Internet infrastructure as well as their continued willingness to preserve the open and interconnected nature of the Internet. We exercise no control over network operators, which makes us vulnerable to any errors, interruptions or delays in their operations. Any material disruption in Internet services could harm our business.

To the extent that the number of Internet users continues to increase, network congestion could adversely affect the reliability of our platform. We may also face increased costs of doing business if network operators engage in discriminatory practices with respect to streamed video content in an effort to monetize access to their networks by data providers. In the past, ISPs have attempted to implement usage-based pricing, bandwidth caps and traffic “shaping” or throttling. To the extent network operators were to create tiers of Internet access service and either charge us for access to these tiers or prohibit our content offerings from being available on some or all of these tiers, our quality of service could decline, our operating expenses could increase and our ability to attract and retain customers could be impaired, each of which would harm our business.

In addition, most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. These network operators have an incentive to use their network infrastructure in a manner adverse to the continued growth and success of other companies seeking to distribute similar video programming. To the extent that network operators are able to provide preferential treatment to their own data and content, as opposed to ours, our business could be harmed.

We could become subject to litigation regarding intellectual property rights that could be costly, result in the loss of rights important to our devices and platform or otherwise harm our business.

Some Internet, technology and media companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use to assert claims against us. Third parties have asserted, and may in the future assert, that we have infringed, misappropriated or otherwise violated their intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us will grow. Plaintiffs who have no relevant product revenue may not be deterred by our own issued patents and pending patent applications in bringing intellectual property rights claims against us. The cost of patent litigation or other proceedings, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of such litigation or proceedings because of their substantially greater financial resources. Patent litigation and other proceedings may also require significant management time and divert management from our business. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could harm our business.

As a result of intellectual property infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on commercially reasonable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, with the potential for our competitors to gain access to the same intellectual property. In addition, the rights that we secure under intellectual property licenses may not include rights to all of the intellectual property owned or controlled by the licensor, and the scope of the licenses granted to us may not include rights covering all of the products and services provided by us and our licensees. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property; cease making, licensing or using technologies that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content or materials; and to indemnify our partners and other third parties. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and would divert the time and attention of our management and technical personnel.

 

30


Table of Contents

Under our agreements with many of our content publishers, licensees, contract manufacturers and suppliers, we are required to provide indemnification in the event our technology is alleged to infringe upon the intellectual property rights of third parties.

In certain of our agreements we indemnify our content publishers, licensees, manufacturing partners and suppliers. We could incur significant expenses defending these partners if they are sued for patent infringement based on allegations related to our technology. In addition, if a partner were to lose a lawsuit and in turn seek indemnification from us, we could be subject to significant monetary liabilities. In addition, because the devices sold by our licensing partners and TV brands often involve the use of third-party technology, this increases our exposure to litigation in circumstances where there is a claim of infringement asserted against the player in question, even if the claim does not pertain to our technology.

If we fail to protect or enforce our intellectual property or proprietary rights, our business and operating results could be harmed.

We regard the protection of our patents, trade secrets, copyrights, trademarks, trade dress, domain names and other intellectual property or proprietary rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We seek to protect our confidential proprietary information, in part, by entering into confidentiality agreements and invention assignment agreements with all our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology. However, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or who had access to our proprietary information, nor can we be certain that our agreements will not be breached. Any party with whom we have executed such an agreement could potentially breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, time-consuming and could result in substantial costs and the outcome of such a claim is unpredictable. Further, the laws of certain foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property or proprietary rights both in the United States and abroad. If we are unable to prevent the disclosure of our trade secrets to third parties, or if our competitors independently develop any of our trade secrets, we may not be able to establish or maintain a competitive advantage in our market, which could harm our business.

We have filed and will in the future file patent applications on inventions that we deem to be innovative. There is no guarantee that our patent applications will issue as granted patents, that the scope of the protection gained will be sufficient or that an issued patent may subsequently be deemed invalid or unenforceable. Patent laws, and scope of coverage afforded by them, have recently been subject to significant changes, such as the change to “first-to-file” from “first-to-invent” resulting from the Leahy-Smith America Invents Act. This change in the determination of inventorship may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions, which may favor larger competitors that have the resources to file more patent applications. Another change to the patent laws may incentivize third parties to challenge any issued patent in the United States Patent and Trademark Office, or USPTO, as opposed to having to bring such an action in U.S. federal court. Any invalidation of a patent claim could have a significant impact on our ability to protect the innovations contained within our devices and platform and could harm our business.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents. We may fail to take the necessary actions and to pay the applicable fees to obtain or maintain our patents. Noncompliance with these requirements can result in abandonment or lapse of a patent or patent application,

 

31


Table of Contents

resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to use our technologies and enter the market earlier than would otherwise have been the case.

We pursue the registration of our domain names, trademarks and service marks in the United States and in certain locations outside the United States. We are seeking to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location.

Litigation may be necessary to enforce our intellectual property or proprietary rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property or proprietary rights, our business may be harmed.

We and our third-party contractors collect, process, transmit and store the personal information of our users, which creates legal obligations and exposes us to potential liability.

We collect, process, transmit and store information about our users’ device usage patterns, and rely on third-party contractors to collect, process, transmit and store personal information of our users, including our users’ credit card data. Further, we and third parties use tracking technologies, including cookies, device identifiers and related technologies, to help us manage and track our users’ interactions with our platform, devices, website and partners’ content streaming channels and deliver relevant advertising for ourselves and on behalf of our partners on our devices.

We collect information about the interaction of users with our devices, our advertisements and our partners’ streaming channels. To deliver relevant advertisements effectively, we must successfully leverage this data as well as data provided by third parties. Our ability to collect and use such data could be restricted by a number of factors, including consumers choosing to opt out from our collection of this data or the ability of our advertisers to use such data to provide more relevant advertisements, restrictions imposed by advertisers, content publishers and service providers, changes in technology, and new developments in laws, regulations and industry standards. For example, our privacy policy outlines the type of data we collect and discloses to users how to disable or restrict such data collection and the use of such data in providing more relevant advertisements. Any restrictions on our ability to collect data could harm our ability to grow our revenue, particularly our advertising revenue which depends on engaging the relevant recipients of advertising campaigns.

Various federal and state laws and regulations govern the collection, use, retention, sharing and security of the data we receive from and about our users. The regulatory environment for the collection and use of consumer data by device manufacturers, online service providers, content distributors, advertisers and publishers is very unsettled in the United States and internationally. Privacy groups and government bodies, including the Federal Trade Commission, have increasingly scrutinized privacy issues with respect to devices that link personal identities or user and device data, with data collected through the Internet, and we expect such scrutiny to continue to increase. The United States and foreign governments have enacted and are considering regulations that could significantly restrict industry participants’ ability to collect, use and share personal information and pseudonymous data, such as by regulating the level of consumer notice and consent required before a company can place cookies or other tracking technologies. Any failure or perceived failure to comply with privacy-related legal obligations, or any compromise of security of user data, may result in governmental enforcement actions, litigation, contractual indemnity or public statements against us by consumer advocacy groups or others. In addition to potential liability, these events could harm our business.

We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards and contractual obligations. Increased regulation of data collection, use and distribution practices, including self-regulation and industry standards, changes in existing

 

32


Table of Contents

laws, enactment of new laws, increased enforcement activity, and changes in interpretation of laws could increase our cost of compliance and operation, limit our ability to grow our business or otherwise harm our business.

If service operators refuse to authenticate streaming channels on our platform, our users may be restricted from accessing certain content on our platform and our business may be harmed.

Certain service operators, including pay TV providers, have from time to time refused to grant our users access to streaming content through “TV Everywhere” channels and have made that content available only on certain devices favored by such service operators, including devices offered by that service operator or its partners. If major service operators do not authenticate popular TV Everywhere channels on our platform, we may be unable to offer a broad selection of popular streaming channels and consumers may not purchase or use our streaming players. If we are unable to continue to provide access to popular streaming channels on our platform, our business may be harmed.

United States or international rules that permit ISPs to limit Internet data consumption by users, including unreasonable discrimination in the provision of broadband Internet access services, could harm our business.

Laws, regulations or court rulings that adversely affect the popularity or growth in use of the Internet, including decisions that undermine open and neutrally administered Internet access, could decrease customer demand for our service offerings, may impose additional burdens on us or could cause us to incur additional expenses or alter our business model. On February 26, 2015, the FCC adopted open Internet rules intended to protect the ability of consumers and content producers to send and receive legal information on the Internet. The FCC’s Open Internet Order prohibits broadband Internet access service providers from: (i) blocking access to legal content, applications, services or non-harmful devices; (ii) throttling, impairing or degrading performance based on content, applications, services or non-harmful devices; and (iii) charging more for favorable delivery of content or favoring self-provisioned content over third-party content. The Open Internet Order also prohibits broadband Internet access service providers from unreasonably interfering with consumers’ ability to select, access and use the lawful content, applications, services or devices of their choosing as well as edge providers’ ability to make lawful content, applications, services or devices available to consumers.

On June 14, 2016, the U.S. Court of Appeals for the District of Columbia Circuit upheld the Open Internet Order against a challenge by twelve parties, including AT&T Inc., the United States Telecom Association and the National Cable & Telecommunications Association. On May 1, 2017, the U.S. Court of Appeals for the District of Columbia Circuit denied rehearing en banc. Multiple parties subsequently requested and received additional time to seek further review of the Open Internet Order from the Supreme Court of the United States. Petitions for certiorari in the proceeding are now due September 28, 2017. In the interim, the FCC issued a notice of proposed rulemaking on May 18, 2017 that proposes to limit or reverse some of the provisions of the Open Internet Order, including its prohibitions against blocking, throttling and paid prioritization. To the extent the appellate courts or the FCC do not uphold sufficient safeguards to protect against discriminatory conduct or in the event that any existing or future rules fail to offer protections against such conduct, network operators may seek to extract fees from us or our content publishers to deliver our traffic or otherwise engage in blocking, throttling or other discriminatory practices, and our business could be harmed.

As we expand internationally, government regulation protecting the non-discriminatory provision of Internet access may be nascent or non-existent. In those markets where regulatory safeguards against unreasonable discrimination are nascent or non-existent and where local network operators possess substantial market power, we could experience anti-competitive practices that could impede our growth, cause us to incur additional expenses or otherwise harm our business. Future regulations or changes in laws and regulations or their existing interpretations or applications could also hinder our operational flexibility, raise compliance costs and result in additional liabilities for us, which may harm our business.

 

33


Table of Contents

Broadband Internet providers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our content publishers could harm our business.

The FCC exercises jurisdiction over many broadband Internet providers in the United States. The FCC could promulgate new regulations or interpret existing regulations in a manner that would cause us or our content publishers to incur significant compliance costs or force us to alter or eliminate certain features or functionality of our products or services which may harm our business. Future FCC regulation affecting providers of broadband Internet access services could impede the penetration of broadband Internet access into certain markets or affect the prices they may charge in such markets. As part of its February 26, 2015 network neutrality order, the FCC changed the regulatory classification of broadband Internet service from a lightly regulated “information service” to a common carrier “telecommunication service.” It also extended regulation to Internet traffic exchange and interconnection arrangements. On May 18, 2017, the FCC issued a notice of proposed rulemaking proposing to reinstate the classification of broadband Internet service as an “information service” that would not be subject to common carrier regulation. Classification as a telecommunications service could subject broadband Internet access to significant new regulation, including rate regulation, although the FCC has decided to forbear at this time from applying many common carrier requirements, including price regulation; market entry and exit regulation; the obligation to contribute to the federal universal service fund; and telephone-specific interconnection and unbundling requirements. Furthermore, many broadband Internet providers provide traditional telecommunications services that are subject to FCC and state rate regulation of interstate telecommunications services, and are recipients of federal universal service fund payments, which are intended to subsidize telecommunications services in areas that are expensive to serve. Changes in rate regulations or in universal service funding rules, either at the federal or state level, could adversely affect these broadband Internet providers’ revenue and capital spending plans. In addition, various international regulatory bodies have jurisdiction over non-United States broadband Internet providers. To the extent these broadband Internet providers are adversely affected by laws or regulations regarding their business, products or service offerings, our business would be harmed.

If government regulations relating to the Internet or other areas of our business change, we may need to alter the manner in which we conduct our business and we may incur greater operating expenses.

We are subject to general business regulations and laws, as well as regulations and laws specific to the Internet, which may include laws and regulations related to user privacy, data collection and protection, consumer protection, payment processing, taxation, intellectual property, electronic contracts, Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction. Litigation and regulatory proceedings are inherently uncertain, and the laws and regulations governing issues such as privacy, payment processing, taxation and consumer protection related to the Internet continue to develop. For example, laws relating to the liability of providers of online services for activities of their users and other third parties have been tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the advertisements posted or the content provided by users. Moreover, as Internet commerce and advertising continues to evolve, increasing regulation by federal, state and foreign regulatory authorities becomes more likely.

As we develop new devices, and improve our TV streaming platform, we may also be subject to new laws and regulations specific to such technologies. For example, in developing our Roku TV reference design, we were required to understand, address and comply with an evolving regulatory framework for developing, manufacturing, marketing and selling TVs. If we fail to adequately address or comply with such regulations regarding the manufacture and sale of TVs, we may be subject to fines or sanctions, and our licensees may be unable to sell Roku TVs at all, which would harm our business and our ability to grow our user base.

Laws relating to privacy and data collection continue to proliferate, often with little harmonization between jurisdictions and little guidance. A number of existing bills are pending in U.S. Congress that contain provisions

 

34


Table of Contents

that would regulate how companies can use cookies and other tracking technologies to collect and use user information. The European Union has already enacted laws requiring advertisers or companies like ours to obtain informed consent from users for the placement of cookies or other tracking technologies and the delivery of relevant advertisements. If the third parties that we work with, such as contract payment processing services, content publishers, vendors or developers violate or are alleged to violate applicable privacy or security laws, industry standards, our contractual obligations, or our policies, such violations and alleged violations may also put our users’ information at risk and could in turn harm our business. Any of these consequences could cause our users, advertisers or publishers to lose trust in us, which could harm our business. Furthermore, any failure on our part to comply with these laws may subject us to liability and reputational harm.

Our use of data to deliver relevant advertising on our platform places us and our content publishers at risk for claims under various unsettled laws, including the Video Privacy Protection Act, or VPPA. Some of our content publishers have been engaged in litigation over alleged violations of the VPPA relating to activities on our platform in connection with advertising provided by unrelated third parties. The Federal Trade Commission has also revised its rules implementing the Children’s Online Privacy Protection Act, or COPPA Rules, broadening the applicability of the COPPA Rules, including the types of information that are subject to these regulations, and could effectively apply to limit the information that we or our content publishers and advertisers collect and use through certain content publishers, the content of advertisements and in relation to certain channel partner content. We and our content publishers and advertisers could be at risk for violation or alleged violation of these and other privacy laws.

Our actual or perceived failure to adequately protect personal data could harm our business.

A variety of state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These privacy and data protection-related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. Compliance with these laws and regulations can be costly and can delay or impede the development of new products.

We historically have relied upon adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU Safe Harbor Framework under Directive 95/46/EC, commonly referred to as the Data Protection Directive, agreed to by the U.S. Department of Commerce and the EU. The U.S.-EU Safe Harbor Framework, which established means for legitimizing the transfer of personal data by U.S. companies from the European Economic Area, or EEA, to the United States, recently was invalidated by a decision of the European Court of Justice, or the ECJ.

On July 12, 2016, the European Commission adopted the EU-U.S. Privacy Shield, which provides a framework for the transfer of personal data of EU data subjects, and on May 4, 2016, the EU General Data Protection Regulation, or GDPR, which will replace Directive 95/46/EC, was formally published. The GDPR will go into effect on May 25, 2018 and as a regulation as opposed to a directive will be directly applicable in EU member states. Among other things, the GDPR applies to data controllers and processors outside of the EU whose processing activities relate to the offering of goods or services to, or monitoring the behavior within the EU of, EU data subjects.

In light of these developments, we are reviewing our business practices and may find it necessary or desirable to make changes to our personal data handling to cause our transfer and receipt of EEA residents’ personal data to be legitimized under applicable European law. The regulation of data privacy in the EU continues to evolve, and it is not possible to predict the ultimate content, and therefore the effect, of data protection regulation over time.

Our actual or alleged failure to comply with applicable laws and regulations or to protect personal data, could result in enforcement actions and significant penalties against us, which could result in negative publicity, increase our operating costs, subject us to claims or other remedies and may harm our business.

 

35


Table of Contents

If we are found liable for content that we distribute through our players, our business would be harmed.

As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, public performance royalties or other claims based on the nature and content of materials that we distribute. The Digital Millennium Copyright Act, or the DMCA, is intended, in part, to limit the liability of eligible service providers for caching, hosting or linking to, user content that includes materials that infringe copyrights or other rights. We rely on the protections provided by the DMCA in conducting our business. However, the DMCA and similar statutes and doctrines that we may rely on in the future is subject to uncertain judicial interpretation and regulatory and legislative amendments. Moreover, the DMCA only provides protection primarily in the United States. If the rules around these statutes and doctrines change, if international jurisdictions refuse to apply similar protections or if a court were to disagree with our application of those rules to our business, we could incur liability and our business could be harmed. If we become liable for these types of claims as a result of the content that is streamed over our platform, then our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our business. Our insurance may not be adequate to cover these types of claims or any liability that may be imposed on us.

In addition, we may be adversely impacted if copyright holders assert claims, or commence litigation, alleging copyright infringement against the developers of channels that are distributed on our platform. While our platform policies prohibit streaming content on our platform without distribution rights from the copyright holder, and we maintain processes and systems for the reporting and removal of infringing content, in certain instances our platform has been misused by unaffiliated third parties to unlawfully distribute copyrighted content. For example, we are involved in litigation in Mexico that was commenced by a large Mexican pay TV and Internet access provider. This case principally targeted entities that are alleged to sell unlicensed content to consumers using our platform, among other means. At the commencement of this case, a court issued a temporary ban on the importation and sale of Roku devices in Mexico, which remains in effect. In the three months ended June 30, 2017, we recorded a charge of $1.0 million for a write-down of inventory on hand and on order and a charge of $0.7 million for sales incentives to sell inventory in other sales channels, each due to the Mexico sales ban. Our involvement in this litigation, or similar legal matters in the future, could cause us to incur significant legal expenses and other costs, and be disruptive to our business.

Our devices are highly technical and may contain undetected hardware errors or software bugs, which could manifest themselves in ways that could harm our reputation and our business.

Our devices and those of our licensees are highly technical and have contained and may in the future contain undetected software bugs or hardware errors. These bugs and errors can manifest themselves in any number of ways in our devices or our platform, including through diminished performance, security vulnerabilities, data quality in logs or interpretation of data, malfunctions or even permanently disabled devices. Some errors in our devices may only be discovered after a device has been shipped and used by users, and may in some cases only be detected under certain circumstances or after extended use. We update our software on a regular basis and, despite our quality assurance processes, we could introduce bugs in the process of updating our software. The introduction of a serious software bug, could result in devices becoming permanently disabled. We offer a limited one year warranty in the United States and any such defects discovered in our devices after commercial release could result in loss of revenue or delay in revenue recognition, loss of customer goodwill and users and increased service costs, any of which could harm our business, operating results and financial condition. We could also face claims for product or information liability, tort or breach of warranty. In addition, our device contracts with users contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of Roku and our devices. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be harmed.

 

36


Table of Contents

Components used in our devices may fail as a result of manufacturing, design or other defects over which we have no control and render our devices permanently inoperable.

We rely on third-party component suppliers to provide certain functionalities needed for the operation and use of our devices. Any errors or defects in such third-party technology could result in errors in our devices that could harm our business. If these components have a manufacturing, design or other defect, they can cause our devices to fail and render them permanently inoperable. For example, the typical means by which our users connect their home networks to our devices is by way of a Wi-Fi access point in the home network router. If the Wi-Fi receiver in our device fails, then our device cannot detect a home network’s Wi-Fi access point, and our device will not be able to display or deliver any content to the TV screen. As a result, we may have to replace these devices at our sole cost and expense. Should we have a widespread problem of this kind, our reputation in the market could be adversely affected and our replacement of these devices would harm our business.

If we are unable to obtain necessary or desirable third-party technology licenses, our ability to develop new devices or platform enhancements may be impaired.

We utilize commercially available off-the-shelf technology in the development of our devices and platform. As we continue to introduce new features or improvements to our devices and the Roku platform, we may be required to license additional technologies from third parties. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. If we are unable to obtain necessary third-party licenses, we may be required to obtain substitute technologies with lower quality or performance standards, or at a greater cost, any of which could harm the competitiveness of our devices, platform and our business.

Our use of open source software could impose limitations on our ability to commercialize our devices and our TV streaming platform.

We incorporate open source software in our TV streaming platform. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Although we monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our devices. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our devices, to re-engineer our devices or to discontinue the sale of our devices in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could harm our business.

The quality of our customer support is important to our users and licensees, and if we fail to provide adequate levels of customer support we could lose users and licensees, which would harm our business.

Our users and licensees depend on our customer support organization to resolve any issues relating to devices. A high level of support is critical for the successful marketing and sale of our devices. We currently outsource our customer support operation to a third-party customer support organization. If we do not effectively train, update and manage our third-party customer support organization who assists our users in using our devices, and if that support organization does not succeed in helping them quickly resolve any issues or provide effective ongoing support, it could adversely affect our ability to sell our devices to users and harm our reputation with potential new users and our licensees.

 

37


Table of Contents

We will need to improve our operational and financial systems to support our expected growth, increasingly complex business arrangements, and rules governing revenue and expense recognition and any inability to do so could adversely affect our billing services and financial reporting.

We have increasingly complex business arrangements with our content publishers and licensees, and the rules that govern revenue and expense recognition in our business are increasingly complex. To manage the expected growth of our operations and increasing complexity, we will need to improve our operational and financial systems, procedures and controls and continue to increase systems automation to reduce reliance on manual operations. Any inability to do so will negatively affect our billing services and financial reporting. Our current and planned systems, procedures and controls may not be adequate to support our complex arrangements and the rules governing revenue and expense recognition for our future operations and expected growth. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could adversely affect our relationships with our users, content publishers or licensees; cause harm to our reputation and brand; and could also result in errors in our financial and other reporting.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may be adversely affected.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with the fiscal year ending December 31, 2018. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Securities Exchange Act of 1934, as amended, or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process will be time-consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 in a timely manner, are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our Class A common stock could be adversely affected. In addition, we could become subject to investigations by the stock exchange on which our Class A common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We may pursue acquisitions, which involve a number of risks, and if we are unable to address and resolve these risks successfully, such acquisitions could harm our business.

We may in the future acquire businesses, products or technologies to expand our offerings and capabilities, user base and business. We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions; however, we have no experience completing or integrating acquisitions. Any acquisition could be material to our financial condition and results of operations and any anticipated benefits from an acquisition may never materialize. In addition, the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures. Acquisitions in international markets would involve additional risks, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We

 

38


Table of Contents

may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operational problems and if we were unable to address such risks successfully our business could be harmed.

We have a credit facility that provides our lender with a first-priority lien against substantially all of our assets and contains financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our financial condition.

We entered into an amended and restated loan and security agreement with Silicon Valley Bank in November 2014, which was amended in May 2015 and June 2017, providing for a $30.0 million revolving line of credit. In June 2017, we entered into a subordinated loan and security agreement with Silicon Valley Bank, which provides for a term loan borrowing of up to $40.0 million with a minimum of $25.0 million to be initially drawn at the close of the agreement and a $5.0 million sublimit for letters of credit. Our loan agreements with Silicon Valley Bank contain a number of restrictive covenants, and the terms may restrict our current and future operations, particularly our ability to respond to certain changes in our business or industry, or take future actions. Pursuant to these agreements, we granted Silicon Valley Bank a security interest in substantially all of our assets. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Silicon Valley Bank Loan and Security Agreements.”

If we fail to comply with the covenants or payments specified in our credit facility, Silicon Valley Bank could declare an event of default, which would give it the right to terminate its commitment to provide additional loans and declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, Silicon Valley Bank would have the right to proceed against the assets we provided as collateral pursuant to the credit facility. If the debt under this credit facility was accelerated, we may not have sufficient cash or be able to sell sufficient assets to repay this debt, which would harm our business and financial condition.

If we fail to comply with the laws and regulations relating to the collection of sales tax and payment of income taxes in the various states in which we do business, we could be exposed to unexpected costs, expenses, penalties and fees as a result of our noncompliance, which could harm our business.

By engaging in business activities in the United States, we become subject to various state laws and regulations, including requirements to collect sales tax from our sales within those states, and the payment of income taxes on revenue generated from activities in those states. The laws and regulations governing the collection of sales tax for sales on our website and payment of income taxes are numerous, complex, and vary from state to state. A successful assertion by one or more states that we were required to collect sales or other taxes or to pay income taxes where we did not could result in substantial tax liabilities, fees and expenses, including substantial interest and penalty charges, which could harm our business.

We may require additional capital to meet our financial obligations and support planned business growth, and this capital might not be available on acceptable terms or at all.

We intend to continue to make significant investments to support planned business growth and may require additional funds to respond to business challenges, including the need to develop new devices and enhance the Roku platform, maintain adequate levels of inventory to support our retail partners’ demand requirements, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our then existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing we secure could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we were to violate the restrictive covenants, we could incur penalties, increased expenses and an acceleration of the payment terms of our outstanding debt, which could in turn harm our business.

 

39


Table of Contents

We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other natural disaster could cause damage to our facilities and computer systems, which could require us to curtail or cease operations.

Our principal offices and a network operations center are located in the San Francisco Bay Area, an area known for earthquakes, and are thus vulnerable to damage. We are also vulnerable to damage from other types of disasters, including power loss, fire, floods, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities could be impaired.

Risks Related to this Offering and Ownership of Our Class A Common Stock

The dual class structure of our common stock as contained in our amended and restated certificate of incorporation has the effect of concentrating voting control with those stockholders who held our stock prior to this offering, including our executive officers, employees and directors and their affiliates, and limiting your ability to influence corporate matters.

Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. Stockholders who hold shares of Class B common stock, including our executive officers, employees and directors and their affiliates, will together hold approximately 98.1% of the voting power of our outstanding capital stock following this offering, and our President and Chief Executive Officer, Anthony Wood, will hold approximately 27.3% of our outstanding common stock, but will control approximately 32.1% of the voting power of our outstanding common stock, following this offering, and therefore will have significant influence over our management and affairs and over all matters requiring stockholder approval, including election of directors and significant corporate transactions, such as a merger or other sale of Roku or our assets, for the foreseeable future. If Mr. Wood’s employment with us is terminated, he will continue to have the same influence over matters requiring stockholder approval.

In addition, the holders of Class B common stock collectively will continue to be able to control all matters submitted to our stockholders for approval even if their stock holdings represent less than 50% of the outstanding shares of our common stock. Because of the 10-to-1 voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock even when the shares of Class B common stock represent as little as 10% of the combined voting power of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A common stock could be adversely affected.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Mr. Wood retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future, control a majority of the combined voting power of our Class A and Class B common stock. As a board member, Mr. Wood owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Wood is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.

 

40


Table of Contents

There has been no prior market for our Class A common stock. An active market may not develop or be sustainable and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our Class A common stock prior to this offering. The initial public offering price for our Class A common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our Class A common stock following this offering. If you purchase shares of our Class A common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our Class A common stock may not develop after this offering or, if it does develop, it may not be sustainable.

Our stock price may be volatile, and you may be unable to sell your shares of Class A common stock at or above the initial public offering price, if at all.

The initial public offering price for the shares of our Class A common stock will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our Class A common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    changes in projected operational and financial results;

 

    loss by us of key content publishers;

 

    changes in laws or regulations applicable to our devices or platform;

 

    the commencement or conclusion of legal proceedings that involve us;

 

    actual or anticipated changes in our growth rate relative to our competitors;

 

    announcements of new products or services by us or our competitors;

 

    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

    additions or departures of key personnel;

 

    issuance of new or updated research or reports by securities analysts;

 

    the use by investors or analysts of third-party data regarding our business that may not reflect our financial performance;

 

    fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

    sales of our Class A common stock;

 

    share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

    the expiration of contractual lock-up agreements; and

 

    general economic and market conditions.

Furthermore, the stock markets frequently experience extreme price and volume fluctuations that affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, elections, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. If the market price of our Class A common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class

 

41


Table of Contents

action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

We will have broad discretion over the use of proceeds from this offering. Investors may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. Our failure to apply the net proceeds of this offering effectively could impair our ability to pursue our growth strategy or could require us to raise additional capital.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A and Class B common stock outstanding immediately following the closing of this offering. Therefore, if you purchase shares of our Class A common stock in this offering at the initial public offering price of $14.00 per share, you will experience immediate dilution of $12.65 per share, the difference between the price per share you pay for our Class A common stock and its pro forma net tangible book value per share as of June 30, 2017, after giving effect to the issuance of shares of our Class A common stock in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of Class B common stock. In addition, we have issued options and warrants to acquire our Class B common stock at prices significantly below the initial public offering price. To the extent outstanding options and warrants are ultimately exercised, there will be further dilution to investors purchasing our Class A common stock in this offering. In addition, if the underwriters exercise their option to purchase additional shares or if we issue additional equity securities, you will experience additional dilution.

Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We may issue additional securities following the closing of this offering. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell Class A common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A common stock.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

Equity research analysts do not currently provide research coverage of our Class A common stock, and we cannot assure you that any equity research analysts will adequately provide research coverage of our Class A common stock after the closing of this offering. A lack of adequate research coverage may adversely affect the liquidity and market price of our Class A common stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The price of our Class A common stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

 

42


Table of Contents

Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.

Sales of a substantial number of shares of our Class A common stock in the public market following the closing of this offering, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our Class A common stock.

Based on shares outstanding as of June 30, 2017, upon the closing of this offering, we will have outstanding a total of 15,668,000 shares of Class A common stock and 79,080,495 shares of Class B common stock, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or warrants, after giving effect to the conversion of all outstanding shares of our preferred stock into shares of Class B common stock immediately upon the closing of this offering and after giving effect to the conversion of 6,668,000 shares of Class B common stock into Class A common stock upon the sale of such shares by the selling stockholders. Of these shares, only the shares of Class A common stock sold in this offering will be freely tradable, without restriction, in the public market immediately after the offering. All of our executive officers and directors and the holders of substantially all the shares of our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock during the period ending on, and including, the 180th day after the date of this prospectus, subject to specified exceptions. Morgan Stanley & Co. LLC and Citigroup Global Markets Inc. may, in their sole discretion and without prior notice, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements expire, all 79,080,495 shares of Class B common stock outstanding as of June 30, 2017 will become eligible for sale, of which 67,262,802 shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements.

In addition, as of June 30, 2017, there were 24,559,747 shares of Class B common stock subject to outstanding options. We intend to register all of the shares of Class A common stock issuable upon conversion of the shares of Class B common stock issuable upon exercise of outstanding options, and upon exercise of settlement of any options or other equity incentives we may grant in the future, for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the lock-up agreements described above. The shares of Class A common stock issuable upon conversion of these shares will become eligible for sale in the public market to the extent such options or warrants are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.

Holders of 76,402,104 shares of our Class B common stock issuable upon the conversion of outstanding shares of preferred stock and shares of preferred stock issuable upon the exercise of outstanding warrants have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file on our behalf or for other stockholders. See “Shares Eligible for Future Sale” and “Underwriters.”

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may harm our business.

As a public company listed in the United States, we will incur significant additional legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and the Nasdaq Global Select Market, or Nasdaq, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources

 

43


Table of Contents

to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

We are an “emerging growth company,” and we intend to comply only with reduced disclosure requirements applicable to emerging growth companies. As a result, our Class A common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of over $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We do not intend to pay dividends in the foreseeable future.

We have never declared or paid any cash dividends on our Class A or Class B common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings to grow our business and for general corporate purposes. Moreover, our outstanding loan and security agreements contain prohibitions on the payment of cash dividends on our capital stock. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management or hinder efforts to acquire a controlling interest in us, and the market price of our Class A common stock may be lower as a result.

There are provisions in our certificate of incorporation and bylaws, as they will be in effect following this offering, that may make it difficult for a third-party to acquire, or attempt to acquire, control of Roku, even if a change in control was considered favorable by our stockholders.

Our charter documents will also contain other provisions that could have an anti-takeover effect, such as:

 

    establishing a classified board of directors so that not all members of our board of directors are elected at one time;

 

44


Table of Contents
    permitting the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

    providing that directors may only be removed for cause;

 

    prohibiting cumulative voting for directors;

 

    requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

 

    authorizing the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

    eliminating the ability of stockholders to call special meetings of stockholders;

 

    prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; and

 

    reflecting our two classes of common stock as described above.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibit a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. Any provision in our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business.

 

45


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will” or the negative of these terms or other similar expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this prospectus, regarding, among other things:

 

    our financial performance, including our revenue, cost of revenue, operating expenses and our ability to attain and sustain profitability;

 

    our ability to attract and retain users and increase hours streamed;

 

    our ability to attract and retain advertisers;

 

    our ability to attract and retain additional TV brands and service operators to license our platform;

 

    our ability to license popular content on our platform, including the renewals of our existing agreements with content publishers;

 

    changes in consumer viewing habits or the growth of TV streaming;

 

    the growth of our relevant markets, including the growth in advertising spend on TV streaming platforms, and our ability to successfully grow our business in those markets;

 

    our ability to adapt to changing market conditions and technological developments, including with respect to developing integrations with our platform partners;

 

    our ability to develop and launch new streaming devices and provide ancillary services and support;

 

    our ability to compete effectively with existing competitors and new market entrants;

 

    our ability to successfully manage domestic and international expansion;

 

    our ability to attract and retain qualified employees and key personnel;

 

    security breaches and system failures;

 

    our ability to maintain, protect and enhance our intellectual property; and

 

    our ability to stay in compliance with laws and regulations that currently apply or may become applicable to our business both in the United States and internationally.

These risks are not exhaustive. Other sections of this prospectus may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur.

 

46


Table of Contents

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or to changes in our expectations.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

47


Table of Contents

INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including the independent industry publications set forth below, as well as reports that we commissioned, and is subject to a number of assumptions and limitations. Although we are responsible for all of the disclosures contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, such information is inherently imprecise. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain information in the text of this prospectus is contained in independent industry publications. The sources of these independent publications are provided below:

 

    Activate, “Think Again—Tech and Media Outlook 2016,” dated October 20, 2015.

 

    Activate, “Think Again—Tech and Media Outlook 2017,” dated October 25, 2016.

 

    comScore, “State of OTT,” dated April 2017.

 

    eMarketer, “US Ad Spending—The eMarketer Forecast for 2017,” dated March 2017.

 

    eMarketer, “US Non-Pay TV Subscription Households, by Type, 2016-2021,” dated July 11, 2017.

 

    Kagan, “Global Set-Top Box Forecast,” dated October 25, 2016.

 

    Nielsen, “The Nielsen Total Audience Report Q4 2016,” dated April 2017.

 

    Nielsen, “NPOWER, Rating Analysis Time Period Report,” dated December 2016.

 

    Ovum, “World Television Information Service Forecasting Tool,” dated January 24, 2017.

 

    Sandvine, “2016 Global Internet Phenomena—Latin America and North America,” as revised June 21, 2016.

In addition, we have commissioned the following report:

 

    Kantar Millward Brown, “Roku Streaming Leadership Study Q1 2017,” dated March 2017.

The content of the foregoing sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein. Nielsen data reflects estimates of market conditions based on samples, and is prepared primarily as a marketing research tool for the media industry and others in the media industry. References to Nielsen should not be considered as Nielsen’s opinion as to the value of any security or the advisability of investing in the Company.

 

48


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of 9,000,000 shares of Class A common stock in this offering will be approximately $113.2 million at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of Class A common stock in this offering by the selling stockholders. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we estimate that the net proceeds to us will be approximately $130.8 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds from this offering primarily for general corporate purposes, including working capital, research and development, sales and marketing activities and capital expenditures. We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, technologies or businesses that complement our business, although we have no commitments or agreements to enter into any such acquisitions or investments. We will have broad discretion over the uses of the net proceeds from this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. The terms of our outstanding loan and security agreements also restrict our ability to pay dividends. Any future determination related to our dividend policy will be made at the discretion of our board of directors.

 

49


Table of Contents

CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2017 on:

 

    an actual basis;

 

    a pro forma basis, to reflect:

 

    the conversion of all 80,844,138 outstanding shares of preferred stock into an equal number of shares of Class B common stock immediately upon the closing of this offering;

 

    the reclassification of all 4,904,357 outstanding shares of common stock into an equal number of shares of our Class B common stock and the authorization of our Class A common stock;

 

    the reclassification of the preferred stock warrant liability to additional paid-in capital upon the conversion of warrants to purchase shares of our convertible preferred stock into warrants to purchase shares of our Class B common stock immediately upon the closing of this offering; and

 

    the filing and effectiveness of our amended and restated certificate of incorporation;

 

    a pro forma as adjusted basis, to give further effect to:

 

    the sale by us of 9,000,000 shares of Class A common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and

 

    the conversion of 6,668,000 shares of Class B common stock into an equivalent number of shares of Class A common stock upon the sale of such shares by the selling stockholders.

You should read this information together with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth in the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

50


Table of Contents
     As of June 30, 2017  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (unaudited)  
     (in thousands, except share and per share data)  

Cash

   $ 70,169     $ 70,169     $ 183,349  
  

 

 

   

 

 

   

 

 

 

Long-term debt, less current portion

   $ 22,811     $ 22,811     $ 22,811  

Preferred stock warrant liability

     14,673              

Convertible preferred stock, $0.0001 par value per share, 84,368,163 shares authorized, 80,844,138 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     213,180              

Stockholders’ (deficit) equity:

      

Preferred stock, $0.0001 par value per share, no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                  

Common stock, $0.0001 par value per share, 150,000,000 shares authorized, 4,904,357 shares issued and outstanding, actual; no shares authorized, shares issued and outstanding, pro forma and pro forma as adjusted

                  

Class A common stock, $0.0001 par value per share, no shares authorized, issued and outstanding, actual; 1,000,000,000 shares authorized, no shares issued and outstanding, pro forma; 1,000,000,000 shares authorized, 15,668,000 shares issued and outstanding, pro forma as adjusted

                 2  

Class B common stock, $0.0001 par value per share, no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, 85,748,495 shares issued and outstanding, pro forma; 150,000,000 shares authorized, 79,080,495 shares issued and outstanding, pro forma as adjusted

           8       8  

Additional paid-in capital

     30,694       258,539       371,717  

Accumulated deficit

     (244,044     (244,044     (244,044
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (213,350     14,503       127,683  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 37,314     $ 37,314     $ 150,494  
  

 

 

   

 

 

   

 

 

 

The outstanding share information in the table above is based on no shares of our Class A common stock and 85,748,495 shares of our Class B common stock (including preferred stock on an as-converted basis and reclassified as common stock) outstanding as of June 30, 2017, and excludes:

 

    24,559,747 shares of Class B common stock issuable upon the exercise of outstanding stock options as of June 30, 2017 with a weighted-average exercise price of $3.88 per share and 3,219,857 shares of Class B common stock issuable upon the exercise of outstanding stock options which were granted in August 2017 with an exercise price of $8.82 per share;

 

    2,225,966 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2017 with a weighted-average exercise price of $2.70 per share, which are expected to remain outstanding after the closing of this offering;

 

    357,283 shares of our Class B common stock issued in July 2017 upon the automatic net exercise of a warrant to purchase 375,000 shares of our Class B common stock outstanding as of June 30, 2017;

 

    4,256,161 additional shares of Class B common stock reserved for future issuance under our 2008 Equity Incentive Plan as of June 30, 2017 (without giving effect to options granted in August 2017), which shares ceased to be available for issuance at the time our 2017 Equity Incentive Plan became effective in connection with this offering;

 

   

12,000,000 shares of Class A common stock reserved for future issuance under our 2017 Equity Incentive Plan, which became effective upon the execution of the underwriting agreement for this offering, as well as (i) any automatic increases in the number of shares of Class A common stock

 

51


Table of Contents
 

reserved for future issuance under this plan and (ii) upon the expiration or termination prior to exercise of any shares of Class B common stock issuable upon the exercise of stock options outstanding under our 2008 Equity Incentive Plan, an equal number of shares of Class A common stock, such number of shares not to exceed 28,000,000;

 

    3,000,000 shares of Class A common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of Class A common stock reserved for future issuance under this plan, which became effective upon the execution of the underwriting agreement for this offering; and

 

    108,332 shares of Class B common stock issued in September 2017 in connection with an acquisition.

 

52


Table of Contents

DILUTION

If you invest in our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

Our pro forma net tangible book value of our common stock as of June 30, 2017 was $14.5 million, or $0.17 per share, based on the total number of shares of our common stock outstanding as of June 30, 2017. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of Class A and Class B common stock, after giving effect to the conversion of all outstanding shares of preferred stock into 80,844,138 shares of Class B common stock immediately upon the closing of this offering.

After giving effect to (i) the conversion of our outstanding preferred stock into Class B common stock immediately upon the closing of this offering, (ii) the reclassification of our common stock into an equal number of shares of our Class B common stock and the authorization of our Class A common stock and (iii) the receipt of the net proceeds from our sale of 9,000,000 shares of Class A common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2017, would have been $127.7 million, or $1.35 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.18 per share to our existing stockholders and immediate dilution of $12.65 per share to investors purchasing Class A common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Initial public offering price per share

      $ 14.00  

Pro forma net tangible book value per share as of June 30, 2017

   $ 0.17     

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     1.18     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

        1.35  
     

 

 

 

Dilution in net tangible book value per share to new investors in this offering

      $ 12.65  
     

 

 

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $1.51 per share, representing an immediate increase to existing stockholders of $1.34 per share, and immediate dilution to new investors in this offering of $12.49 per share.

The following table summarizes, as of June 30, 2017, on the pro forma as adjusted basis described above:

 

    the total number of shares of Class B common stock purchased from us by our existing stockholders and Class A common stock by new investors purchasing shares in this offering;

 

    the total consideration paid to us by our existing stockholders and by new investors purchasing Class A common stock in this offering, at the initial public offering price of $14.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering; and

 

53


Table of Contents
    the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     85,748,495        91   $ 218,659,126        63   $ 2.55  

New investors

     9,000,000        9       126,000,000        37     14.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     94,748,495        100   $ 344,659,126        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The total number of shares of our common stock reflected in the discussion and tables above is based on no shares of our Class A common stock and 85,748,495 shares of our Class B common stock (including preferred stock on an as-converted basis and reclassified common stock) outstanding as of June 30, 2017, and excludes:

 

    24,559,747 shares of Class B common stock issuable upon the exercise of outstanding stock options as of June 30, 2017 with a weighted-average exercise price of $3.88 per share and 3,219,857 shares of Class B common stock issuable upon the exercise of outstanding stock options which were granted in August 2017 with an exercise price of $8.82 per share;

 

    2,225,966 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2017 with a weighted-average exercise price of $2.70 per share, which are expected to remain outstanding after the closing of this offering;

 

    357,283 shares of our Class B common stock issued in July 2017 upon the automatic net exercise of a warrant to purchase 375,000 shares of our Class B common stock outstanding as of June 30, 2017;

 

    4,256,161 additional shares of Class B common stock reserved for future issuance under our 2008 Equity Incentive Plan as of June 30, 2017 (without giving effect to options granted in August 2017), which shares ceased to be available for issuance at the time our 2017 Equity Incentive Plan became effective in connection with this offering;

 

    12,000,000 shares of Class A common stock reserved for future issuance under our 2017 Equity Incentive Plan, which became effective upon the execution of the underwriting agreement for this offering, as well as (i) any automatic increases in the number of shares of Class A common stock reserved for future issuance under this plan and (ii) upon the expiration or termination prior to exercise of any shares of Class B common stock issuable upon the exercise of stock options outstanding under our 2008 Equity Incentive Plan, an equal number of shares of Class A common stock, such number of shares not to exceed 28,000,000;

 

    3,000,000 shares of Class A common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of Class A common stock reserved for future issuance under this plan, which became effective upon the execution of the underwriting agreement for this offering; and

 

    108,332 shares of Class B common stock issued in September 2017 in connection with an acquisition.

Sales by selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 79,080,495 shares, or 83% of the total number of shares of our common stock outstanding following the completion of this offering, and will increase the number of shares held by new investors to 15,668,000 shares, or 17% of the total number of shares outstanding following the completion of this offering.

After giving effect to the sale of shares in this offering by us and the selling stockholders, if the underwriters exercise in full their option to purchase additional shares from us and the selling stockholders, the number of shares held by existing stockholders will be reduced to 78,080,295 shares, or 81% of the total number of shares of our common stock outstanding following the completion of this offering, and will increase the number of shares held by new investors to 18,018,200 shares, or 19% of the total number of shares outstanding following the completion of this offering.

 

54


Table of Contents

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, including upon the exercise of outstanding warrants, there will be further dilution to investors participating in this offering. If all outstanding warrants and options under our 2008 Equity Incentive Plan as of June 30, 2017 were exercised, then our existing stockholders, including the holders of these warrants and options, would own 87% and new investors would own 13% of the total number of shares of Class A and Class B common stock outstanding upon the closing of this offering.

 

55


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the selected consolidated financial and other data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data included in this section are not intended to replace the consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the consolidated statements of operations data for the fiscal years ended December 26, 2015 and December 31, 2016 and consolidated balance sheet data as of December 26, 2015 and December 31, 2016 from our audited financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the six months ended July 2, 2016 and June 30, 2017 and the consolidated balance sheet data as of June 30, 2017 from our unaudited consolidated interim financial statements and related notes included elsewhere in this prospectus. Our unaudited consolidated interim financial statements were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and results for the six months ended June 30, 2017 are not necessarily indicative of results to be expected for the full fiscal year.

Prior to 2017, our fiscal year was the 52- or 53-week period that ends on the last Saturday of December. Our fiscal years 2015 and 2016 ended on December 26, 2015 and December 31, 2016, respectively. In 2017, we changed our fiscal year-end to match the calendar year-end. Fiscal year 2015 spanned 52 weeks and fiscal year 2016 spanned 53 weeks. The two fiscal quarters ending July 2, 2016 and June 30, 2017 spanned 27 weeks and 26 weeks, respectively, and references to the six months ended July 2, 2016 refer to the two fiscal quarters ended July 2, 2016, unless otherwise indicated.

 

                                                                                           
     Fiscal Year Ended      Six Months Ended  
     December 26,      December 31,
     July 2,      June 30,  
     2015      2016      2016      2017  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

           

Net revenue:

           

Player

   $ 269,977      $ 293,929      $ 119,116      $ 117,329  

Platform

     49,880        104,720        43,140        82,391  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenue

     319,857        398,649        162,256        199,720  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue:

           

Player(1)

     221,416        249,821        99,375        103,122  

Platform(1)

     8,663        27,783        12,549        20,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     230,079        277,604        111,924        123,243  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit:

           

Player

     48,561        44,108        19,741        14,207  

Platform

     41,217        76,937        30,591        62,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross profit

     89,778        121,045        50,332        76,477  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Research and development(1)

     50,469        76,177        38,471        48,118  

Sales and marketing(1)

     45,153        52,888        26,245        28,722  

General and administrative(1)

     31,708        35,341        18,255        20,855  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     127,330        164,406        82,971        97,695  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

56


Table of Contents
                                                                                           
     Fiscal Year Ended     Six Months Ended  
     December 26,     December 31,     July 2,     June 30,  
     2015     2016     2016     2017  
     (in thousands, except share and per share data)  

Loss from operations

   $ (37,552   $ (43,361   $ (32,639   $ (21,218
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Interest expense

     (696     146       (131     (471

Change in fair value of preferred stock warrant liability

     (1,768     888       (394     (2,651

Other income (expense), net

     (448     (220     (25     211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (40,464     (42,547     (33,189     (24,129

Income tax expense

     147       211       53       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (40,611   $ (42,758   $ (33,242   $ (24,215
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

   $ (10.08   $ (9.01   $ (7.08   $ (4.98
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted

     4,030,579       4,745,943       4,696,170       4,866,028  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders-basic and diluted (unaudited)(2)

     $ (0.51     $ (0.25
    

 

 

     

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share attributable to common stockholders-basic and diluted (unaudited)(2)

       85,590,081         85,710,166  
    

 

 

     

 

 

 

Other Financial and Operational Data (unaudited):

        

Adjusted EBITDA (in thousands)(3)

   $ (29,713   $ (29,853   $ (25,784   $ (14,045

Hours Streamed (in millions)(4)

     5,498       9,351       4,172       6,742  

Active Accounts (in thousands)(5)

     9,179       13,383       10,552       15,116  

ARPU for the preceding four fiscal quarters (in dollars)(6)

   $ 6.48     $ 9.28     $ 8.32     $ 11.22  

 

(1) Stock-based compensation was allocated as follows:

 

     Fiscal Year Ended      Six Months Ended  
     December 26,      December 31,     

July 2,

    

June 30,

 
     2015      2016      2016      2017  
     (in thousands)  

Cost of player revenue

   $ 90      $ 136      $ 58      $ 74  

Cost of platform revenue

     54        224        102        40  

Research and development

     1,685        2,766        1,273        1,881  

Sales and marketing

     1,678        2,292        1,157        1,291  

General and administrative

     1,777        2,788        1,415        1,307  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 5,284      $ 8,206      $ 4,005      $ 4,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 11 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of basic and diluted net loss per common share and pro forma net loss per common share.
(3)

We define Adjusted EBITDA as net loss, plus: other (income) expense, net, stock-based compensation, depreciation and amortization, and income tax expense. See the section titled “Non-GAAP Financial Measures” below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable

 

57


Table of Contents
  generally accepted accounting principle, or GAAP, financial measure and a discussion about the limitations of Adjusted EBITDA.
(4) We define hours streamed as the aggregate amount of time users streamed content from channels on our platform in a given period including both channels installed from our channel stores and non-certified channels. Non-certified channels are channels that are accessed by users utilizing a code provided to the user by the content publisher, and are not found in the Roku Channel Store. In each of the periods presented hours streamed from non-certified channels comprised less than 8% of total hours streamed. Hours streamed are reported on a calendar basis.
(5) We define active accounts as the number of distinct user accounts that have streamed any content on our platform in the last 30 days of the period. Active accounts are reported on a calendar basis.
(6) We define average revenue per user as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters.

 

     December 26,
2015
    December 31,
2016
    June 30,
2017
 

Consolidated Balance Sheet Data:

      

Cash

   $ 75,748     $ 34,562     $ 70,169  

Total assets

     176,511       179,078       184,996  

Preferred stock warrant liability

     10,878       9,990       14,673  

Long-term debt, including current portion

     15,000       15,000       22,811  

Total liabilities

     123,067       159,722       185,166  

Convertible preferred stock

     213,180       213,180       213,180  

Total stockholders’ (deficit) equity

     (159,736     (193,824     (213,350

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus Adjusted EBITDA, a non-GAAP financial measure. We have provided below a reconciliation between Adjusted EBITDA and net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this prospectus because it is a key measure we use to evaluate our operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP.

Some limitations of Adjusted EBITDA are:

 

    Adjusted EBITDA does not include other (income) expense, net, which primarily includes changes in fair value of warrants to purchase convertible preferred stock and interest expense;

 

    Adjusted EBITDA does not include the impact of stock-based compensation;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures;

 

    Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

58


Table of Contents
    Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:

 

     Fiscal Year Ended     Six Months Ended  
     December 26,
2015
    December 31,
2016
    July 2,
2016
    June 30,
2017
 
    

(in thousands)

 

Reconciliation of Net Loss to Adjusted EBITDA:

        

Net loss

   $ (40,611   $ (42,758   $ (33,242   $ (24,215

Other (income) expense, net

     2,912       (814     550       2,911  

Stock-based compensation

     5,284       8,206       4,005       4,593  

Depreciation and amortization

     2,555       5,302       2,850       2,580  

Income tax expense

     147       211       53       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (29,713   $ (29,853   $ (25,784   $ (14,045
  

 

 

   

 

 

   

 

 

   

 

 

 

 

59


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Prior to 2017, our fiscal year was the 52- or 53-week period that ends on the last Saturday of December. Our fiscal years 2015 and 2016 ended on December 26, 2015 and December 31, 2016, respectively. In 2017, we changed our fiscal year-end to match the calendar year-end. Fiscal year 2015 spanned 52 weeks and fiscal year 2016 spanned 53 weeks. The two fiscal quarters ending July 2, 2016 and June 30, 2017 spanned 27 weeks and 26 weeks, respectively, and references to the six months ended July 2, 2016 refer to the two fiscal quarters ended July 2, 2016, unless otherwise indicated.

Overview

We pioneered streaming to the TV. Roku connects users to the streaming content they love, enables content publishers to build and monetize large audiences, and provides advertisers with unique capabilities to engage consumers. We do this at scale today. As of June 30, 2017, we had 15.1 million active accounts. By comparison, the fourth largest multichannel video programming distributor in the United States had approximately 13.3 million subscribers as of June 30, 2017. Our users streamed more than 6.7 billion hours on the Roku platform in the six months ended June 30, 2017, 62% growth from the six months ended June 30, 2016. TV streaming’s disruptive content distribution model is shifting billions of dollars of economic value. Roku is capitalizing on this large economic opportunity as a leading TV streaming platform for users, content publishers and advertisers.

Consumers win with TV streaming—they get a better user experience, more entertainment options and more control over what they spend on content. When users want to enjoy streaming entertainment, they start at the Roku home screen where we put users first by helping them find the content they want to watch. From our home screen, users can easily search, discover and access over 500,000 movies and TV episodes in the United States, as well as live sports, music, news and more. Users can also compare the price of content from various channels available on our platform and choose from ad-supported, subscription, and transactional video on-demand content. Consumers can personalize their content selection with cable TV replacement offerings and streaming services that suit their budget and needs.

Roku operates the number one TV streaming platform in the United States as measured by total hours streamed, according to a survey conducted in the first quarter of 2017 by Kantar Millward Brown that we commissioned. Content publishers and advertisers win with Roku because our large and growing user base simplifies their access to the fragmented and complex over the top, or OTT, market and we provide them with direct to consumer engagement and monetization opportunities. We provide our content publishers with access to the most engaged OTT audience, as measured by average hours streamed and the ability to monetize their content with advertising, subscription or transactional business models. Advertisers on our platform can reach our desirable OTT audience with ads that are more relevant, interactive and measurable than advertising delivered on traditional linear TV. Our growth in active accounts and hours streamed attracts more content publishers and advertisers to our TV streaming platform, creating a better user experience, which in turn attracts more users. As our platform improves for users, content publishers and advertisers, we grow average revenue per user, or ARPU.

While we currently generate a majority of our revenue from sales of our streaming players, our business model is to grow gross profit by increasing the number of active accounts and growing ARPU, which we believe

 

60


Table of Contents

represents the inherent value of our business model. We grow new accounts through three primary channels: we sell streaming players, we partner with TV brands through our Roku TV licensing program, and we have licensing relationships with service operators. The fastest growing source of new accounts comes from our licensing partner relationships which accounted for 42% of new accounts in 2016, up from 26% in 2015. We believe we have a significant opportunity to grow platform revenue and as we further monetize TV streaming hours we will increase ARPU. ARPU, which we define as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters, was $11.22 per active user in the period ended June 30, 2017 and $9.28 per active user in 2016, up 43% from $6.48 in 2015. Our success in growing ARPU will depend on our ability to increasingly generate platform revenue from content publishers and advertisers as we increase the number of active accounts.

We have achieved significant growth. In the six months ended June 30, 2017, we generated revenue of $199.7 million, up 23% from $162.3 million in the six months ended July 2, 2016. We generate player revenue from the sale of streaming players and platform revenue from advertising, content distribution, billing and licensing activities on our platform. We earn revenue as users engage on our platform and we intend to continue to grow platform revenue by further monetizing our TV streaming platform. In the six months ended June 30, 2017, player revenue represented 59% of total revenue and declined 2%, and platform revenue represented 41% of total revenue and grew 91% from the six months ended July 2, 2016.

In the six months ended June 30, 2017, we generated gross profit of $76.5 million, up 52% from $50.3 million in the six months ended July 2, 2016. In the six months ended June 30, 2017, player gross profit represented 19% of total gross profit and declined 28%, and platform gross profit represented 81% of total gross profit and grew 104%. We are strategically decreasing our streaming player average selling prices, or ASP, to expand our active accounts, which will also reduce our player gross margin. As a result, our player revenue may not increase as rapidly as it has historically or at all, and, unless we are able to adequately increase our platform revenue and grow our active accounts, we may be unable to grow gross profit and our business will be harmed. We expect to continue to make tradeoffs away from player gross profit in favor of platform gross profit to grow active accounts more rapidly and increase monetization. In the six months ended June 30, 2017 our net loss was $(24.2) million and our Adjusted EBITDA was $(14.0) million. In fiscal 2016 our net loss was $(42.8) million and our Adjusted EBITDA was $(29.9) million. See the section titled “Non-GAAP Financial Measures” below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable generally accepted accounting principle, or GAAP, financial measure and a discussion about the limitations of Adjusted EBITDA.

 

61


Table of Contents

Key Performance Metrics

We use the following key performance metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. Our key performance metrics are gross profit, active accounts, hours streamed and average revenue per user.

Gross Profit

We measure the performance of our business using gross profit, and we are focused on increasing gross profit. We currently generate positive gross profit on player revenue, however, the majority of our gross profit is generated from platform revenue. We believe gross profit is the primary metric to measure the performance of our business, because we have two revenue segments with different margin profiles, and we aim to maximize our high margin platform revenue from our active accounts as they stream content on our platform.

Gross Profit

(in millions)

 

LOGO

 

62


Table of Contents

Active Accounts

We define active accounts as the number of distinct user accounts that have streamed content on our platform in the last 30 days of the period. The number of active accounts 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 use multiple devices. We believe that the number of active accounts is a relevant measure to gauge the size of our user base and the opportunity to increase our platform revenue and gross profit.

Active Accounts

(in millions)

 

LOGO

 

63


Table of Contents

Hours Streamed

We define hours streamed as the aggregate amount of time users streamed content on our platform in a given period. We report hours streamed on a calendar basis. We believe the usage of 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. However, our revenues from content providers are not tied to the hours streamed on their streaming channels, and the number of hours streamed does not correlate to revenue earned from such content providers or ARPU on a period-by-period basis. Additionally, increasing user engagement on our streaming platform increases our gross profit because we earn platform revenue by delivering advertising as well as generating revenue shares from subscription and transactional video on-demand partners as users engage with the Roku platform.

Quarterly Hours Streamed

(in billions)

 

LOGO

 

64


Table of Contents

Average Revenue per User

We define ARPU, as our platform revenue during the preceding four fiscal quarters divided by the average of the number of active accounts at the end of that period and the end of the prior four fiscal quarters. We measure progress in our platform business using ARPU because it helps us understand the rate at which we are monetizing our active account base.

Average Revenue per User

 

LOGO

Factors Affecting Our Performance

Rate of TV streaming and advertising shift to OTT

Consumers have significantly shifted their TV viewing behavior, and we believe all TV content will be available through streaming. Therefore, we also believe this presents a large market opportunity for streaming TV advertising. This is a critical component of our business model because our platform and player revenue, as well as our overall expense structure, is dependent on this shift. In addition, the number of hours streamed on our platform is a critical element of our business because hours determine our advertising inventory and sell through.

User acquisition strategy

Consumers become our users through three primary channels: Roku players, Roku TVs, or through a service operator we have a licensing relationship with. We monetize our user base through platform revenue. We do not optimize gross profit from the sale of our players, but we currently earn a positive gross profit on sales of our players. This is similar to a “negative” user acquisition cost. Player revenue and player gross profit may decrease over time as we strategically aim to acquire new customers through low cost player solutions.

Ability to grow and retain streaming hours

Growth in platform revenue, gross profit and ARPU will depend on growth in streaming hours. Since 2013, average quarterly streaming hours per user cohort have steadily increased over time and each subsequent cohort started engaging with our platform at a higher streaming hour base. For example, the average quarterly streaming hours per user for our 2013 cohort was initially 138 hours for the second quarter of 2013 and grew 11% annually through the fourth quarter of 2016. The average quarterly streaming hours per user for subsequent cohorts were initially 164 and 188 hours for the second quarter of 2014 and 2015, respectively, and increased annually at a similar annual rate through the fourth quarter of 2016. We have experienced high streaming hour retention, as

 

65


Table of Contents

measured by total hours streamed, per cohort per year. We measure streaming hour retention for our 15 quarterly active account cohorts, dating back to the first quarter of 2013. In the three months ended June 30, 2017, the average streaming hour retention across all 15 cohorts was 96% compared to the three months ended March 31, 2017.

Ability to monetize users and streaming hours

Our business model depends on our ability to monetize user engagement with our platform. Content publishers distribute streaming content through subscription video on demand, or SVOD, advertising video on demand, or AVOD, and transactional video on demand, or TVOD models. Some content publishers utilize a combination of models. The majority of our streaming hours to date have been SVOD hours, in line with the current OTT market, where we can earn revenue from subscription revenue share or from display ads on our home screen or screen saver, but we do not monetize hours streamed. The fastest growing content monetization is AVOD, where we can monetize hours with video ads delivered to users as they stream content. In the six months ended June 30, 2017, hours streamed that included advertising grew to 2.9 billion, 76% growth from the six months ended June 30, 2016. We believe Roku is an important platform for advertising dollars that will be redeployed from traditional TV. Our ability to leverage our data to provide users with relevant ads and measure the effectiveness of these advertisements on our platform is also a key factor to an increased wallet share of advertising budgets spent on our platform. We evaluate the effectiveness of our AVOD offerings using a wide variety of metrics, including exposure (e.g., reach, frequency and video completion rates); demographics (e.g., what types of users we believe were exposed, including age, gender and income); top-funnel brand impact (e.g., aided/unaided recall, brand perception and purchase intent); and bottom-funnel brand impact (e.g., website visitation, store visitation and actual purchase). We conduct this evaluation through a combination of internal data and data collected through partnerships with outside research firms, all leveraging our knowledge of individual users and the fact that we serve ads on a 1:1 basis. When promoting content, such as through audience development, our typical metrics are ad impressions and clicks, channel downloads, visits, subscription trials, time spent in the channel and retention. While we have experienced, and expect to continue to experience, growth in our advertising revenue as we have expanded our user base and streaming hours, our efforts to monetize our platform through AVOD content are still developing and our revenue from AVOD offerings may not grow as we expect. This means of monetization will require us to continue to attract advertising dollars to our platform as well as deliver AVOD content that appeals to users.

Continued investment in growth

We believe that our future performance will depend on the success of the investments we have made, and will continue to make, to improve the value for users, content publishers and advertisers on our platform. We must regularly update and enrich the Roku platform to meet evolving consumer behavior and deliver a superior user experience. Further, it is important that we remain a frictionless platform for content delivery and invest to provide content publishers with best-in-class publishing tools and actionable audience insights. We must continue to innovate and invest in our advertising capabilities and technology so that we attract and encourage incremental advertising spend on our platform.

Competition

The market for streaming media is continuing to grow and evolve. We face substantial competition from large technology and consumer electronics companies, including Amazon, Apple and Google. These competitors have increased consumer awareness of TV streaming and contributed to the growth of the overall market, but their resources and brand recognition pose significant competitive challenges. Our success in capitalizing on the expanding opportunities in the streaming market will depend on our ability to continue to deliver high quality devices at competitive prices, in the face of this competition.

 

66


Table of Contents

Seasonality

We generate significantly higher levels of revenue and gross profit in the fourth quarter of the year. While both platform and player revenue experience seasonality, player revenue has historically been more seasonal than platform revenue, driven by the holiday shopping season. Fourth quarter revenue comprised 40% and 37% of our fiscal 2015 and 2016 total net revenue, respectively, and fourth quarter gross profit comprised 39% and 37% of our fiscal 2015 and 2016 gross profit, respectively.

Components of Results of Operations

Player Revenue

We generate player revenue from the sale of streaming players through consumer retail distribution channels, including major brick and mortar retailers, such as Best Buy and Walmart, and online retailers, primarily Amazon.com. In our international markets, we sell our players through wholesale distributors which, in turn, sell to retailers. We currently distribute our players in Canada, the United Kingdom, the Republic of Ireland and France. We generate most of our player revenue in the United States.

Platform Revenue

We generate platform revenue from advertising sales, subscription and transaction revenue share, sales of branded channel buttons on remote controls and licensing arrangements with TV brands and service operators. We generate most of our platform revenue in the United States. Our first-party video ad inventory includes native display ads on our home screen and screen saver, as well as ad inventory made available to us through our content publisher agreements. To satisfy existing demand, we can sell video advertising that we purchase from content publishers to supplement our first-party video ad inventory, and to a lesser extent, third-party video advertising on a revenue share basis from content publishers in our Roku Direct Publisher program.

Cost of Revenue

Cost of Player Revenue

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

Cost of Platform Revenue

Cost of platform revenue consists of advertising inventory acquisition costs, payment processing fees, third-party cloud service fees and allocated personnel-related costs, including salaries, benefits and stock-based compensation for Roku personnel that support platform services, including advertising and billing operations, customer service, and our TV brands and our service operator licensees. We anticipate that cost of platform revenue will increase in absolute dollars.

Operating and Other Expenses

Research and Development

Research and development expenses consist primarily of personnel-related costs, including employee salaries, benefits and stock-based compensation for our engineers and other employees engaged in the development of our products including new technologies and features and functionality. In addition, research and development expenses include allocated facilities and overhead costs. We believe continued investment is important to attaining our strategic objectives and expect research and development expenses to increase in absolute dollars for the foreseeable future.

 

67


Table of Contents

Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related costs, including salaries, benefits, commissions and stock-based compensation expense for our employees engaged in sales and sales support, data science and analytics, business development, product management, marketing, communications, and partner and customer support functions. Sales and marketing expenses also include costs for marketing and public relations, channel merchandising, including point of purchase and in-store displays, trade shows and other events, professional services, travel and allocated facilities and other overhead. We expect our sales and marketing expenses to increase as we continue to grow our business.

General and Administrative

General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative personnel. We expect our general and administrative expenses to increase following the completion of this offering due to the anticipated growth of our business and related infrastructure as well as accounting, legal, insurance, investor relations and other costs associated with becoming a public company.

Other Income (Expense), Net

Our other income (expense), net consists primarily of changes in the fair value of our convertible preferred stock warrant liability, interest expense on our debt, and foreign currency remeasurement and transaction gains and losses. As the underlying shares of our convertible preferred stock warrants are contingently redeemable, we account for these warrants as a liability at fair value and re-measure the value at each balance sheet date. Any change in the fair value is recognized as other income (expense), net in our consolidated statement of operations, until the earlier of the exercise of the warrants, or the completion of a deemed liquidation event, including an initial public offering. At that time, the convertible preferred stock warrant liability will be reclassified to stockholders’ equity.

Income Tax Expense

Our income tax expense consists primarily of income taxes in certain foreign jurisdictions where we conduct business and state minimum income taxes in the United States. We have a valuation allowance for deferred tax assets, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this valuation allowance for the foreseeable future.

 

68


Table of Contents

Results of Operations

The following table sets forth our results of operations for the periods presented.

 

     Fiscal Year Ended     Six Months Ended  
    

December 26,

   

December 31,

   

July 2,

   

June 30,

 
     2015     2016     2016     2017  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

        

Net revenue:

        

Player

   $ 269,977     $ 293,929     $ 119,116     $ 117,329  

Platform

     49,880       104,720       43,140       82,391  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     319,857       398,649       162,256       199,720  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Player(1)

     221,416       249,821       99,375       103,122  

Platform(1)

     8,663       27,783       12,549       20,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     230,079       277,604       111,924       123,243  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

        

Player

     48,561       44,108       19,741       14,207  

Platform

     41,217       76,937       30,591       62,270  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     89,778       121,045       50,332       76,477  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development(1)

     50,469       76,177       38,471       48,118  

Sales and marketing(1)

     45,153       52,888       26,245       28,722  

General and administrative(1)

     31,708       35,341       18,255       20,855  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     127,330       164,406       82,971       97,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (37,552     (43,361     (32,639     (21,218
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Interest expense

     (696     146       (131     (471

Change in fair value of preferred stock warrant liability

     (1,768     888       (394     (2,651

Other income (expense), net

     (448     (220     (25     211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (40,464     (42,547     (33,189     (24,129

Income tax expense

     147       211       53       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (40,611   $ (42,758   $ (33,242   $ (24,215
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation as follows:

 

     Fiscal Year Ended      Six Months Ended  
    

December 26,

    

December 31,

    

July 2,

    

June 30,

 
     2015      2016      2016      2017  
     (in thousands)  

Cost of player revenue

   $ 90      $ 136      $ 58      $ 74  

Cost of platform revenue

     54        224        102        40  

Research and development

     1,685        2,766        1,273        1,881  

Sales and marketing

     1,678        2,292        1,157        1,291  

General and administrative

     1,777        2,788        1,415        1,307  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $    5,284      $    8,206      $    4,005      $    4,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

69


Table of Contents

The following table sets forth our results of operations as a percentage of net revenue:

 

     Fiscal Year Ended     Six Months Ended  
    

December 26,

   

December 31,

   

July 2,

   

June 30,

 
     2015     2016         2016             2017      

Net revenue:

        

Player

     84     74     73     59

Platform

     16       26       27       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     100       100       100       100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Player

     69       63       61       52  

Platform

     3       7       8       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     72       70       69       62  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

        

Player

     15       11       12       7  

Platform

     13       19       19       31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     28       30       31       38  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     16       19       24       24  

Sales and marketing

     14       13       16       14  

General and administrative

     10       9       11       11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     40       41       51       49  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12     (11     (20     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Interest expense

                 0       0  

Change in fair value of convertible preferred stock warrants

     (1           0       (1

Other income (expense), net

                 0       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (13     (11     (20     (12

Income tax expense

                 0       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (13 )%      (11 )%      (20 )%      (12 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Six Months Ended July 2, 2016 and June 30, 2017

Net Revenue

 

     Six Months Ended               
     July 2,      June 30,       
     2016      2017      Change $     Change %  
    

(dollars in thousands)

 

Player, net

   $ 119,116      $ 117,329      ($ 1,787     (2 )% 

Platform

     43,140        82,391        39,251       91  
  

 

 

    

 

 

    

 

 

   

Total net revenue

   $ 162,256      $ 199,720      $ 37,464       23
  

 

 

    

 

 

    

 

 

   

Player

Player revenue decreased 2% from $119.1 million in the six months ended July 2, 2016 to $117.3 million in the six months ended June 30, 2017. A 37% increase in the volume of players sold was offset by a 29% decrease

 

70


Table of Contents

in average selling prices, driven primarily by sales of our lower priced Roku Express which was introduced in the third quarter of 2016, and by an increase in sales incentives, including $0.7 million in sales incentives to sell inventory in other sales channels due to the Mexico sales ban.

Platform

Platform revenue increased 91% from $43.1 million in the six months ended July 2, 2016 to $82.4 million in the six months ended June 30, 2017. The increase was primarily due to higher advertising and subscription and transaction revenue share of $38.4 million, as we expanded our advertising sales operations and increased our advertising inventory, and from an increase in the number of paid subscriptions. In addition, fees earned from license arrangements with TV brands increased by $1.5 million while fees earned from arrangements with service operators decreased by $0.7 million.

Cost of Revenue

 

     Six Months Ended      Change $     Change %  
     July 2,      June 30,       
     2016      2017       
     (dollars in thousands)  

Cost of revenue:

          

Player

   $ 99,375      $ 103,122      $ 3,747       4

Platform

     12,549        20,121        7,572       60  
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 111,924      $ 123,243      $ 11,319       10
  

 

 

    

 

 

    

 

 

   

Gross profit:

          

Player

   $ 19,741      $ 14,207      ($ 5,534     (28 )% 

Platform

     30,591        62,270        31,679       104  
  

 

 

    

 

 

    

 

 

   

Gross Profit

   $ 50,332      $ 76,477      $ 26,145       52
  

 

 

    

 

 

    

 

 

   

Player

Cost of player revenue increased 4% from $99.4 million in the six months ended July 2, 2016 to $103.1 million in the six months ended June 30, 2017. Cost of player revenue increased on an absolute dollar basis primarily due to a 37% increase in the number of players sold. In addition, we incurred a charge of $1.0 million for the write-down of inventory on hand and on order due to the Mexico sales ban. The increase in cost of player revenue was partially offset by a reduction in direct manufacturing costs for most of our players.

Gross profit on player sales decreased 28% from $19.7 million in the six months ended July 2, 2016 to $14.2 million in the six months ended June 30, 2017. The decrease was primarily due to higher sales volumes of lower priced players, such as the Roku Express, and by an increase in sales incentives.

Platform

Cost of platform revenue increased 60% from $12.5 million in the six months ended July 2, 2016 to $20.1 million in the six months ended June 30, 2017. This increase was driven by higher inventory acquisition costs and credit card processing fees totaling $4.5 million and a $2.1 million increase in allocated overhead primarily in service operator support and advertising operations driven by the growth of our platform business.

Gross profit on platform revenue increased 104% from $30.6 million in the six months ended July 2, 2016 to $62.3 million in the six months ended June 30, 2017, primarily driven by strong growth in advertising demand.

 

71


Table of Contents

Operating Expenses

 

     Six Months Ended      Change $      Change %  
     July 2,      June 30,        
     2016      2017        

Research and development

   $ 38,471      $ 48,118      $ 9,647        25

Sales and marketing

     26,245        28,722        2,477        9  

General and administrative

     18,255        20,855        2,600        14  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 82,971      $ 97,695      $ 14,724        18
  

 

 

    

 

 

    

 

 

    

Research and Development

Research and development expenses increased 25% from $38.5 million in the six months ended July 2, 2016 to $48.1 million in the six months ended June 30, 2017. The increase was primarily due to higher personnel-related costs of $10.8 million as a result of increased headcount for engineering and platform development. The increase in personnel-related costs was partially offset by lower facilities expenses of $2.1 million. In the six months ended July 2, 2016, we incurred $2.7 million in allocated lease exit costs associated with the move of our corporate headquarters.

Sales and Marketing

Sales and marketing expenses increased 9% from $26.2 million in the six months ended July 2, 2016 to $28.7 million in the six months ended June 30, 2017. The increase was primarily due to higher personnel-related costs of $3.9 million as a result of increased headcount in connection with the growth of our advertising sales organization and data science team. The increase was partially offset by lower retail marketing costs of $1.0 million and lower facilities expenses of $0.5 million, primarily related to allocated lease exit costs associated with the move of our corporate headquarters, in the six months ended July 2, 2016.

General and Administrative

General and administrative expenses increased 14% from $18.3 million in the six months ended July 2, 2016 to $20.9 million in the six months ended June 30, 2017. The increase was primarily due to higher personnel-related costs of $1.7 million as a result of increased headcount in finance and human resources and other professional service expenses of $0.7 million.

Other Income (Expense), Net

 

     Six Months Ended     Change $  
     July 2,     June 30,    
         2016         2017    
     (in thousands)  

Interest expense

   $ (131   $ (471   $ (340

Change in fair value of convertible preferred stock warrants

     (394     (2,651     (2,257

Other income (expense), net

     (25     211       236  
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (550   $ (2,911   $ (2,361
  

 

 

   

 

 

   

 

 

 

Other income (expense), net, increased from $0.6 million in the six months ended July 2, 2016 to $2.9 million in the six months ended June 30, 2017. The increase was primarily due to an increase in the fair value of warrants to purchase convertible preferred stock.

 

72


Table of Contents

Income Tax Expense

 

     Six Months Ended      Change $  
     July 2,      June 30,     
         2016              2017         
     (dollars in thousands)  

Income tax expense

   $ 53      $ 86      $ 33  

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

Comparison of Fiscal Years Ended December 26, 2015 and December 31, 2016

Net Revenue

 

     Fiscal Year Ended      Change $      Change %  
    

December 26,

    

December 31,

       
     2015      2016        
     (dollars in thousands)  

Player

   $ 269,977      $ 293,929      $ 23,952        9

Platform

     49,880        104,720        54,840        110  
  

 

 

    

 

 

    

 

 

    

Total net revenue

   $ 319,857      $ 398,649      $ 78,792        25
  

 

 

    

 

 

    

 

 

    

Player

Player revenue increased 9% from $270.0 million in fiscal 2015 to $293.9 million in fiscal 2016. The increase was driven primarily by an 18% increase in the volume of players sold, offset by a 10% decrease in average selling prices driven primarily by sales of our lower priced players.

Platform

Platform revenue increased 110% from $49.9 million in fiscal 2015 to $104.7 million in fiscal 2016. The increase was primarily due to higher advertising and subscription revenue share of $48.9 million, as we expanded our advertising sales operations and an increased revenue share from an increase of subscriptions through our platform. In addition, we generated an additional $4.6 million in fees earned from license arrangements with service operators.

Cost of Revenue

 

     Fiscal Year Ended      Change $     Change %  
    

December 26,

    

December 31,

      
     2015      2016       
     (dollars in thousands)  

Cost of revenue:

          

Player

   $ 221,416      $ 249,821      $ 28,405       13%  

Platform

     8,663        27,783        19,120       221  
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 230,079      $ 277,604      $ 47,525       21%  
  

 

 

    

 

 

    

 

 

   

Gross profit:

          

Player

   $ 48,561      $ 44,108      $ (4,453     (9)%  

Platform

     41,217        76,937        35,720       87     
  

 

 

    

 

 

    

 

 

   

Total gross profit

   $ 89,778      $ 121,045      $ 31,267       35%  
  

 

 

    

 

 

    

 

 

   

 

73


Table of Contents

Player

Cost of player revenue increased 13% from $221.4 million in fiscal 2015 to $249.8 million in fiscal 2016. Cost of player revenue increased on an absolute dollar basis primarily due to the 18% increase in the volume of players sold and, to a lesser extent, to increased provisions for inventory reserves and excess component liabilities, resulting from product transitions and to increased royalty costs arising from the execution of a patent and technology license agreement with a patent owner that included a release of potential claims for past liabilities. The increase in cost of player revenue was partially offset by a reduction in direct manufacturing costs for most players.

Gross profit on player sales decreased 9% from $48.6 million in fiscal 2015 to $44.1 million in fiscal 2016. The decrease was primarily due to higher volume mix of lower margin players in addition to the items noted above.

Platform

Cost of platform revenue increased 221% from $8.7 million in fiscal 2015 to $27.8 million fiscal 2016. The increase was primarily due to higher costs incurred to acquire advertising inventory, an increase in credit card processing and other fees related to the growth of our platform billing services, and higher allocated overhead primarily in advertising operations, customer support, service operator support and third-party cloud service fees.

Gross profit on platform revenue increased 87% from $41.2 million in fiscal 2015 to $76.9 million in fiscal 2016.

Operating Expenses

 

     Fiscal Year Ended      Change $      Change %  
    

December 26,

    

December 31,

       
     2015      2016        
     (dollars in thousands)  

Research and development

   $ 50,469      $ 76,177      $ 25,708        51

Sales and marketing

     45,153        52,888        7,735        17  

General and administrative

     31,708        35,341        3,633        11  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 127,330      $ 164,406      $ 37,076        29
  

 

 

    

 

 

    

 

 

    

Research and Development

Research and development expenses increased 51% from $50.5 million in fiscal 2015 to $76.2 million in fiscal 2016. The increase was primarily due to higher personnel-related costs of $19.3 million as a result of the hiring of additional engineering and platform development personnel, higher facility expenses of $5.3 million from our expanded engineering facilities in the United States, United Kingdom and China, and higher consulting expenses of $1.1 million.

Sales and Marketing

Sales and marketing expenses increased 17% from $45.2 million in fiscal 2015 to $52.9 million in fiscal 2016. The increase was primarily due to higher personnel-related costs of $8.5 million due to an increase in headcount in connection with the expansion of our platform business and marketing, as well as $2.4 million of higher facilities expenses. These increases were partially offset by a decrease in product marketing spending.

General and Administrative

General and administrative expenses increased 11% from $31.7 million in fiscal 2015 to $35.3 million in fiscal 2016. The increase was primarily due to higher personnel-related costs of $5.3 million as a result of

 

74


Table of Contents

increased headcount in finance, legal and human resources, in addition to other professional and outside service expenses of $1.3 million. These increases were largely incurred to support the growth in our business. These increases were partially offset by the recovery of a bad debt originally written off in fiscal 2015.

Other Income (Expense), Net

 

     Fiscal Year Ended     Change $  
     December 26,     December 31,    
     2015     2016    
     (in thousands)  

Interest expense

   $ (696   $ 146     $ 842  

Change in fair value of convertible preferred stock warrants

     (1,768     888       2,656  

Other income, net

     (448     (220     228  
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (2,912   $ 814     $ 3,726  
  

 

 

   

 

 

   

 

 

 

Other income (expense), net decreased from a $2.9 million net charge in fiscal 2015 to a $0.8 million net credit in fiscal 2016. The decrease was primarily due to lower expenses related to changes in fair value of warrants to purchase convertible preferred stock and a decrease in interest expense due to lower balances on borrowings under our credit facilities.

Income Tax Expense

 

     Fiscal Year Ended      Change $  
     December 26,      December 31,     
     2015      2016     
     (dollars in thousands)  

Income tax expense

   $ 147      $ 211      $ 64  

The increase in income tax expense in fiscal 2016 was primarily due to foreign income taxes and higher state minimum income taxes in the United States.

 

75


Table of Contents

Unaudited Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of operations data in dollars and as a percentage of revenue, as well as other financial and operational data, for each of the ten quarters ended June 30, 2017. The fiscal quarter ended April 2, 2016 spanned 14 weeks and all other quarters spanned 13 weeks. We have prepared the quarterly data on a basis consistent with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

    Three Months Ended  
    Mar 28,
2015
    Jun 27,
2015
    Sep 26,
2015
    Dec 26,
2015
    Apr 2,
2016
    Jul 2,
2016
    Oct 1,
2016
    Dec 31,
2016
    Mar 31,
2017
    Jun 30,
2017
 
    (in thousands)  

Consolidated Statements of Operations Data:

                   

Net revenue:

                   

Player

  $ 54,869     $ 52,937     $ 55,863     $ 106,308     $ 58,901     $ 60,215     $ 64,789     $ 110,024     $ 63,678     $ 53,651  

Platform

    8,787       10,233       10,732       20,128       19,546       23,594       24,264       37,316       36,415       45,976  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    63,656       63,170       66,595       126,436       78,447       83,809       89,053       147,340       100,093       99,627  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Player(1)

    44,866       42,000       47,260       87,290       47,904       51,471       56,156       94,290       52,910       50,212  

Platform(1)

    1,141       1,351       1,874       4,297       5,287       7,262       6,847       8,387       8,343       11,778  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    46,007       43,351       49,134       91,587       53,191       58,733       63,003       102,677       61,253       61,990  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

                   

Player

    10,003       10,937       8,603       19,018       10,997       8,744       8,633       15,734       10,768       3,439  

Platform

    7,646       8,882       8,858       15,831       14,259       16,332       17,417       28,929       28,072       34,198  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    17,649       19,819       17,461       34,849       25,256       25,076       26,050       44,663       38,840       37,637  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Research and development(1)

    10,877       11,691       13,493       14,408       20,059       18,412       18,229       19,477       22,342       25,776  

Sales and marketing(1)

    9,778       10,516       11,842       13,017       14,284       11,961       12,844       13,799       14,055       14,667  

General and administrative(1)

    6,921       6,386       8,097       10,304       9,883       8,372       9,078       8,008       10,278       10,577  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,576       28,593       33,432       37,729       44,226       38,745       40,151       41,284       46,675       51,020  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (9,927     (8,774     (15,971     (2,880     (18,970     (13,669     (14,101     3,379       (7,835     (13,383
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

                   

Interest expense

    (202     (173     (139     (182     (99     (32     (32     309       (167     (304

Change in fair value of convertible preferred stock warrants

    (447     (50     (1,261     (10           (394     1,481       (199     (735     (1,916

Other income (expense), net

    (237     229       (261     (179     (40     15       (41     (154     83       128  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (886     6       (1,661     (371     (139     (411     1,408       (44     (819     (2,092
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    (10,813     (8,768     (17,632     (3,251     (19,109     (14,080     (12,693     3,335       (8,654     (15,475

Income tax expense

    43       36       35       33       24       29       50       108       48       38  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (10,856   $ (8,804   $ (17,667   $ (3,284   $ (19,133   $ (14,109   $ (12,743   $ 3,227     $ (8,702   $ (15,513
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial and Operational Data (unaudited):

                   

Adjusted EBITDA (in thousands)(2)

  $ (8,458   $ (6,888   $ (13,791   $ (576   $ (14,868   $ (10,916   $ (10,739   $ 6,670     $ (4,413   $ (9,632

Hours streamed (in millions)(3)