10-KPeriod: FY2010

NETFLIX INC Annual Report, Year Ended Dec 31, 2010

Filed February 18, 2011For Securities:NFLX

Summary

Netflix Inc.'s 2010 10-K filing reveals a company in a significant growth phase, transitioning from a DVD-by-mail service to a leading global internet subscription service for streaming TV shows and movies. By the end of 2010, Netflix had amassed 20 million subscribers, with the majority now favoring streaming over DVDs. The company's core strategy centers on expanding its streaming content library and improving user experience across various devices to drive subscriber growth both domestically and internationally. Despite strong subscriber growth, Netflix faces intense competition from traditional media providers, other internet content platforms, and retail/kiosk services. The company's future success hinges on its ability to continuously attract and retain subscribers by offering a compelling value proposition amidst this competitive landscape. Significant investments in content licensing and technology are highlighted as key drivers for growth, alongside a cautious approach to international expansion, with Canada already launched and further markets planned for 2011. Investors should note the company's evolving business model, the increasing importance of streaming, and the associated risks related to content acquisition, competition, and technological infrastructure.

Financial Highlights

49 data points
Beta

Revenue

$2.16B

37.2% Gross Margin

Net Income

$160.85M

7.4% Net Margin

EPS (Diluted)

$0.04

Total Assets

$982.07M

Cash & Equivalents

$194.50M

Free Cash Flow

$242.56M

Financial Statements
Beta
Revenue$2.16B
Cost of Revenue$1.36B
Gross Profit$805.27M
R&D Expenses$163.33M
Operating Expenses$521.63M
Operating Income$283.64M
Interest Expense$19.63M
Net Income$160.85M
EPS (Basic)$0.04
EPS (Diluted)$0.04
Shares Outstanding (Basic)3.68B
Shares Outstanding (Diluted)3.80B

Key Highlights

  • 1Netflix reached 20 million subscribers by the end of 2010, a substantial increase and a clear indicator of strong market demand.
  • 2The majority of subscribers (over 50%) viewed more content via streaming than through DVDs by mail, signaling a decisive shift in viewing habits and Netflix's strategic focus.
  • 3International expansion began in Canada in September 2010, with plans for further global growth anticipated in the latter half of 2011.
  • 4Revenue grew to $2.16 billion in 2010, up from $1.67 billion in 2009, driven by a significant increase in the average number of paying subscribers.
  • 5Subscriber acquisition cost (SAC) saw a notable decrease to $18.03 in 2010 from $25.48 in 2009, indicating improved marketing efficiency.
  • 6Content acquisition and licensing expenses increased significantly, reflecting substantial investment in expanding the streaming library, which is crucial for subscriber retention and growth.
  • 7The company reported $160.8 million in net income for 2010, demonstrating strong profitability alongside its growth trajectory.

Frequently Asked Questions

Netflix's core strategy is to grow its streaming subscription business both within the United States and internationally. This involves continuously expanding its streaming content library, enhancing user interfaces, and extending its service to more internet-connected devices, all while aiming to maintain operating margin targets.

Netflix faces intense competition from various players, including multichannel video programming distributors (MVPDs) with Video-on-Demand (VOD) content (like cable and satellite providers), other internet content providers (such as Apple's iTunes, Amazon, Hulu, and YouTube), traditional DVD rental outlets (like Blockbuster and Redbox), and entertainment retailers.

Netflix obtains content through fixed-fee licenses, revenue sharing agreements, and direct purchases. A significant risk is the increasingly long-term and fixed-cost nature of these content acquisition licenses, which could adversely affect financial condition and future results if subscriber growth does not meet expectations. Additionally, the company is dependent on studios and distributors licensing content for internet delivery, and changes in terms or unwillingness to license could impact its streaming service.

In 2010, Netflix passed a significant milestone where the majority of its subscribers viewed more content via streaming than by DVD. This shift is central to Netflix's strategy, with expectations to become primarily a global streaming business. The company is investing heavily in streaming content and technology to support this transition, recognizing the large global market opportunity for internet-delivered entertainment.