10. REVENUE

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (the “new revenue standard”) using the modified retrospective method. The Company applied the new revenue standard to all contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods.

Practical expedients and exemptions

The Company reflected the aggregate effect of all modifications that occurred prior to the date of adoption.

The Company expensed sales commissions when incurred because the amortization period is less than one year. The sales commissions are included in “Sales and marketing” expenses in the condensed consolidated statements of operations.

Impact on beginning balances

The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows (in thousands):

	As of			Adjustment on			As of
Balance Sheet line items impacted	December 31, 2017			adoption of new revenue standard			January 1, 2018
Assets:
Accounts receivables, net	$	120,553		$	12,728		$	133,281
Inventories		32,740			(108	)		32,632
Prepaid expenses and other current assets		11,367			4,113			15,480
Deferred cost of revenue, current portion		3,007			(1,076	)		1,931
Deferred cost of revenue, non-current portion		5,403			(3,885	)		1,518
Other non-current assets		3,429			(222	)		3,207
Liabilities:
Accounts payable and accrued liabilities		128,757			1,250			130,007
Deferred revenue, current portion		34,501			8,449			42,950
Deferred revenue, non-current portion		48,511			(36,488	)		12,023
Equity:
Accumulated deficit		(283,338	)		38,339			(244,999	)

Revenue recognition

Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. This is achieved by applying the following five-step approach:

•

Identification of the contract, or contracts, with a customer

•

Identification of the performance obligations in the contract

•

Determination of the transaction price

•

Allocation of the transaction price to the performance obligations in the contract

•

Recognition of revenue when, or as, performance obligations are satisfied.

The majority of the Company’s revenue recognized in the condensed consolidated statements of operations is revenue from contracts with customers. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue. Revenue is recorded net of taxes collected or accrued. Sales taxes are recorded as current liabilities until remitted to the relevant government authority.

The Company does not have any capitalized costs associated with contract acquisition because most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less.

Arrangements with multiple performance obligations

The Company’s contracts may contain multiple distinct performance obligations. The transaction price is allocated to each performance obligation based on a relative stand-alone selling price (“SSP”). For performance obligations that the Company routinely sells separately, the SSP is determined by evaluating such stand-alone sales. For those performance obligations that are not routinely sold separately, the Company determines SSP based on a market assessment approach, or on an expected cost-plus margin approach.

Nature of products and services

Platform segment:

The Company’s platform segment generates 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.

The Company’s advertising revenue is mostly generated through video and display advertising delivered through advertising impressions. The Company enters into arrangements with advertising agencies that purchase advertising on its platform on behalf of the agencies’ clients. These advertising arrangements are typically sold on a cost-per-thousand basis and are evidenced by an Insertion Order (“IO”) that specifies the terms of the arrangement such as the type of ad product, pricing, insertion dates, and number of impressions in a stated period. Revenue is recognized over time based on the number of impressions delivered. IOs may include multiple performance obligations as they generally contain several different advertising products that each represent a separately identifiable promise within the contract. For such arrangements, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. Stand-alone selling prices are based on the prices charged to customers. In addition, advertising revenue is also recognized as a distinct performance obligation as part of a content distribution arrangement with content publishers.

The Company earns revenue share from content publishers based on user subscriptions activated or billed through the Company’s platform and from purchases or renting of publishers’ media. The Company’s revenue share is generally equal to a fixed percentage of the price charged by the content publisher or a contractual flat fee.

The Company sells branded channel buttons on player and TV remote controls that provide one-touch access to the publishers’ content. The Company typically receives a fixed fee per button unit over a defined distribution period.

The Company licenses its technology and proprietary operating system to service operators and TV brands. Arrangements with service operators generally include performance obligations comprised of a license to the technology and proprietary operating system, unspecified upgrades or enhancements, hosting of a branded channel store, and engineering and support services. The Company has determined that the license for the technology and the operating system is one performance obligation. Licensing fees from service operators are mostly generated from unit activations or flat fees and ongoing maintenance.

Arrangements with TV brands commonly include license to technology and proprietary operating system over a specified term including updates and upgrades. Licensing revenues from TV brands are generated on a flat fee basis or from per unit licensing fees earned. These arrangements may also include marketing development funds generated on a flat fee basis or a per unit basis. These incentive fees are included as a reduction to the estimated transaction price for these licensing arrangements and associated remaining performance obligations.

Nature of performance obligations	Revenue recognition
Digital advertising	Digital advertising is comprised of performance obligations that are recognized either at a point in time or over time depending on the nature of the advertising product.
Content distribution services	The revenue share from the content publishers included in the estimated transaction price is based on the expected value for which a significant reversal of revenue is not expected to occur. The estimate of the variable consideration is based on the assessment of historical, current, and forecasted performance of the content publishers’ applications. Revenue is recognized on a time elapsed basis, by day, over the contractual distribution term.
Branded channel buttons	The button fees included in the estimated transaction price are based on the expected value for which a significant reversal of revenue is not expected to occur. The estimate of the variable consideration is based on the Company’s assessment of historical, current, and forecasted player and Roku TV volumes. Revenue is recognized on a time elapsed basis, by day, over the distribution term.
License of technology and operating system	The revenue for licensing of technology and operating system is recognized at a point in time, when the control has transferred to the customer, which usually occurs when the Company makes the IP available to the customer.
Unspecified upgrades to the IP	The revenue allocated to unspecified upgrades is recognized on a time elapsed basis, by day, over the service period.
Hosting services	Hosting fees are recognized on a time elapsed basis, by day, over the service period.
Professional services	The professional services revenue is recognized as the services are provided or accepted.

Player segment:

The Company sells the majority of its players through retail distribution channels, including brick and mortar and online retailers, and through the Company’s website. The Company includes allowances for returns and sales incentives in the estimated transaction price. These estimates are based on historical experience, anticipated performance and the Company’s best estimate at the time.

The Company’s player sales include two performance obligations:

•

hardware, which includes embedded software, and

•

unspecified upgrades or enhancements on a when-and-if available basis.

The Company has determined that its hardware and embedded software be considered as one performance obligation because the customer cannot benefit from the hardware or the embedded software either on its own or together with other resources that are readily available to the customer.


Nature of performance obligations	Revenue recognition
Players	Revenue recognition occurs at a point in time when control has transferred to the customer, which is based on the contractual terms.
Unspecified upgrades to the software embedded in the hardware	The Company initially records the allocated value of the unspecified upgrades as deferred revenue and recognizes it into player revenue ratably on a time elapsed basis, by day, over the estimated economic life of the associated players.

Revenue disaggregation

The Company’s disaggregated revenues are represented by the two reportable segments discussed in Note 12. The disaggregation is based on the evaluations that are regularly performed by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM is its Chief Executive Officer.

Transaction price allocated to future performance obligations

The estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied, excluding contracts with original durations of one year or less, amounts in accordance with ASC 606-10-55-18, or amounts of variable consideration attributable to royalties, at the end of the March 31, 2018 is $53.7 million, of which the Company expects to recognize approximately 51% of the revenue over the next 12 months and the remainder thereafter, through 2024.

Contract balances

Accounts receivable are recorded at the amount invoiced, net of an allowance for doubtful accounts, with payment terms ranging from 30 to 90 days. Since the timing of revenue recognition differs from the timing of invoicing to customers, it gives rise to contract balances. Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed. The contract assets are transferred to the receivables when the rights become unconditional. The Company’s contract assets are current in nature and are included in “Prepaid expenses and other current assets”.

The contract liabilities are recorded as deferred revenue and primarily relate to the advance consideration received from customers. Revenue is recognized when the performance obligation is completed and transfer of control occurs.

The table below reflects contract balances of the Company (in thousands):

	As of		As of adoption
	March 31, 2018		January 1, 2018
Accounts receivable, net	$	106,094	$	133,281
Contract assets, current portion		3,945		4,113
Deferred revenue, current portion		33,948		42,950
Deferred revenue, non-current portion		13,549		12,023

Revenue recognized during the three months ended March 31, 2018, from amounts included in deferred revenue at the beginning of the period was approximately $21.3 million. Of this amount, approximately $12.4 million related to the delivery of intellectual property. This delivery also resulted in an increase to contract assets of approximately $2.7 million during the three months ended March 31, 2018.

Impact of adoption for three months ended March 31, 2018

The impact of adoption of the new revenue standard on January 1, 2018, on the condensed consolidated balance sheet and statements of operations is reflected in the table below (in thousands):

	As of March 31, 2018

Impact on balance sheet line items	As Reported			Balances without adoption of the new revenue standard			Impact of adoption Higher / (Lower)
Assets:
Accounts receivable, net	$	106,094		$	94,070		$	12,024
Inventories		38,062			38,062			—
Prepaid expenses and other current assets		30,546			26,831			3,715
Deferred cost of revenue, current portion		1,359			4,466			(3,107	)
Deferred cost of revenue, non-current portion		—			5,248			(5,248	)
Liabilities:
Accounts payable and accrued liabilities		111,776			110,526			1,250
Deferred revenue, current portion		33,948			32,089			1,859
Deferred revenue, non-current portion		13,549			48,196			(34,647	)
Equity:
Accumulated Deficit		(251,673	)		(290,595	)		38,922

	Three Months Ended March 31, 2018

Impact on statements of operations line items	As Reported			Balances without adoption of the new revenue standard			Impact of adoption Higher / (Lower)
Net Revenue:
Platform	$	75,077		$	71,864		$	3,213
Player		61,499			59,449			2,050
Total net revenue		136,576			131,313			5,263
Cost of Revenue:
Platform		21,666			18,475			3,191
Player		51,798			50,309			1,489
Total cost of revenue		73,464			68,784			4,680
Gross Profit:
Platform		53,411			53,389			22
Player		9,701			9,140			561
Total gross profit		63,112			62,529			583
Operating Expenses:
Research and development		34,126			34,126			—
Sales and marketing		20,318			20,318			—
General and administrative		15,570			15,570			—
Total operating expenses		70,014			70,014			—
Loss from Operations		(6,902	)		(7,485	)		583
Net income (loss)	$	(6,634	)	$	(7,217	)	$	583