10-KPeriod: FY2015

NETFLIX INC Annual Report, Year Ended Dec 31, 2015

Filed January 28, 2016For Securities:NFLX

Summary

Netflix, Inc. (NFLX) in its 2015 10-K filing demonstrates a company heavily invested in global expansion and original content, driving significant revenue growth primarily through its streaming services. While global streaming memberships showed strong year-over-year increases (30% in 2015), this expansion came at the cost of increased operating expenses, particularly in content acquisition and marketing, leading to a notable decrease in net income and operating income compared to the previous year. The company's strategy to transition from a DVD-by-mail service to a global internet television network is evident, with the DVD segment's revenue and memberships declining but still contributing positively to overall profitability and funding growth initiatives. Significant investments in technology and development, alongside a substantial increase in long-term debt, highlight the company's aggressive growth strategy and its reliance on capital markets to fuel its ambitious content pipeline and international reach.

Financial Highlights

48 data points
Beta

Revenue

$6.78B

32.3% Gross Margin

Net Income

$122.64M

1.8% Net Margin

EPS (Diluted)

$0.03

Total Assets

$10.20B

Cash & Equivalents

$1.81B

Free Cash Flow

-$840.69M

Financial Statements
Beta
Revenue$6.78B
Cost of Revenue$4.59B
Gross Profit$2.19B
R&D Expenses$570.00M
Operating Income$305.83M
Interest Expense$132.72M
Net Income$122.64M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)4.26B
Shares Outstanding (Diluted)4.36B

Key Highlights

  • 1Robust revenue growth driven by a 30% increase in global streaming memberships, reaching 74.7 million by year-end 2015.
  • 2Significant international expansion, with international memberships growing by 64% and contributing 35% of total streaming memberships by the end of 2015.
  • 3Increased investment in content and marketing, leading to a 23% revenue increase but a 54% decrease in net income and a 24% decrease in operating income year-over-year.
  • 4The DVD-by-mail segment continues its decline, with memberships down 16% in 2015, but still maintains a strong 50% contribution margin.
  • 5Substantial increase in long-term debt, from $885.8 million in 2014 to $2,371.4 million in 2015, primarily to fund operations and content investments.
  • 6Technology and Development expenses increased by 38%, reflecting ongoing investment in service improvements and infrastructure.
  • 7The company is strategically shifting focus towards original programming, which requires significant upfront investment but is seen as a key differentiator for member attraction and retention.

Frequently Asked Questions

Netflix's primary growth strategy is to expand its streaming membership business globally. This involves continuously improving the member experience by expanding streaming content, with a focus on original programming, enhancing the user interface, and extending the service to more internet-connected screens. The company aims to achieve this within the parameters of its consolidated net income and operating segment contribution profit targets.

Netflix is funding its growth through a combination of operational cash flows, available cash reserves, and capital markets. The filing highlights a significant increase in long-term debt, with total long-term debt rising from $885.8 million in 2014 to $2,371.4 million in 2015. This debt issuance is explicitly stated as a means to fund international expansion, investment in original content, and other corporate purposes.

Netflix anticipates a continued decline in its DVD-by-mail memberships, as the company strategically shifts its focus to its streaming services. However, the filing indicates that the domestic DVD business is expected to continue generating significant contribution profit, which will help provide capital resources to fund international growth. The company is not planning to increase resources dedicated to its DVD operations.

Key risks identified include the ability to attract and retain members in a competitive market, changes in competitive offerings (including piracy), the long-term and fixed cost nature of content commitments, managing rapid growth and international expansion, potential regulatory and economic risks from international operations, cybersecurity threats, reliance on third-party partners (like AWS), intellectual property claims, and significant debt obligations. The company also notes the volatility of its stock price as a risk factor for investors.