10-KPeriod: FY2017

NETFLIX INC Annual Report, Year Ended Dec 31, 2017

Filed January 29, 2018For Securities:NFLX

Summary

Netflix, Inc. (NFLX) in its 2018 10-K filing for the fiscal year ending December 30, 2017, highlights its position as a leading internet television network with over 117 million streaming memberships globally. The company's core strategy is focused on expanding its streaming membership business internationally while maintaining profit margin targets. Significant investments in original programming are driving content costs but also differentiating the service and attracting/retaining members. While the domestic DVD segment is in decline, it continues to contribute profit, with those resources being reallocated to the growth of the streaming service. Financially, the company is experiencing robust revenue growth, largely driven by its international segment, which is increasingly contributing to overall revenue. However, this growth is accompanied by substantial investments in content, leading to negative free cash flow and an increasing debt burden. Management emphasizes its strategy to finance these investments through debt markets, believing the after-tax cost of debt is lower than equity. Investors should closely monitor membership growth, content spending, international expansion, and the company's ability to manage its increasing debt obligations.

Financial Highlights

47 data points
Beta

Revenue

$11.69B

31.3% Gross Margin

Net Income

$558.93M

4.8% Net Margin

EPS (Diluted)

$0.13

Total Assets

$19.01B

Cash & Equivalents

$2.82B

Free Cash Flow

-$1.96B

Financial Statements
Beta
Revenue$11.69B
Cost of Revenue$8.03B
Gross Profit$3.66B
R&D Expenses$981.00M
Operating Income$838.68M
Interest Expense$238.20M
Net Income$558.93M
EPS (Basic)$0.13
EPS (Diluted)$0.13
Shares Outstanding (Basic)4.32B
Shares Outstanding (Diluted)4.47B

Key Highlights

  • 1Global streaming memberships surpassed 117 million by year-end 2017, with international memberships comprising 49% of the total.
  • 2Revenues grew by 32% year-over-year, driven significantly by a 58% increase in international segment revenues.
  • 3The company is heavily investing in original content, leading to a substantial increase in content assets ($14.7 billion) and content liabilities ($7.5 billion).
  • 4Free cash flow was negative at approximately $(2.0) billion, primarily due to significant upfront payments for streaming content acquisition and production.
  • 5Long-term debt increased significantly to $6.5 billion, reflecting financing activities to support content investments and operations.
  • 6The domestic DVD segment continues its decline, with memberships decreasing by 18%, though it still generated positive contribution profit.
  • 7The Tax Cuts and Jobs Act of 2017 introduced new tax regulations, including a one-time transition tax on foreign earnings, impacting the company's tax provision.

Frequently Asked Questions

Netflix's primary growth strategy is to expand its streaming membership business globally, with a strong focus on international markets. This involves continuously enhancing the member experience through expanding content offerings, particularly original programming, and improving the user interface and accessibility across various devices.

Netflix is funding its substantial content investments primarily through debt financing, believing the after-tax cost of debt is more favorable than equity. While cash flow from operations has been negative due to these investments, the company anticipates that its existing cash reserves, operating cash flows, and access to financing sources, including a revolving credit facility, will be sufficient to meet its needs for at least the next twelve months.

Key risks and challenges include intense competition from existing and new entertainment providers, the risk of not attracting and retaining members if content choices or user experience are not compelling, the long-term and fixed cost nature of content commitments limiting operating flexibility, potential liability related to content production and distribution, and risks associated with international operations such as regulatory differences, currency fluctuations, and adapting to local customs. The company also faces risks related to cybersecurity and reliance on third-party technology providers like AWS.

The domestic DVD-by-mail segment is in a period of decline, with memberships decreasing. However, it is still anticipated to generate significant contribution profit, which helps to provide capital resources to fund the growth and investments in the streaming service. Netflix does not plan to increase resources or meaningfully improve the technology for its DVD operations.