10-K/APeriod: FY2017

NETFLIX INC Annual Report (Amendment), Year Ended Dec 31, 2017

Filed February 5, 2018For Securities:NFLX

Summary

Netflix's 2017 Form 10-K highlights a period of significant growth and aggressive investment in content, particularly original programming, which is driving international expansion and revenue increases. While global streaming memberships grew substantially by 25% to over 117 million, the company's strategy of heavily investing in content has led to negative free cash flows for several years, necessitating financing through debt. The company's financial position shows increasing revenues and operating income, but also a substantial increase in long-term debt and content liabilities. Investors should note the company's heavy reliance on content acquisition and production, which carries inherent risks and significant financial commitments. While the domestic DVD segment continues to decline, it still contributes profit, albeit with diminishing importance. The company's future growth is heavily tied to its ability to attract and retain streaming subscribers globally, manage content costs, and navigate a competitive landscape, all while managing significant 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, marking a 25% increase from the previous year.
  • 2Total revenues grew by 32% to $11.69 billion in 2017, driven by strong performance in both domestic and international streaming segments.
  • 3International streaming revenues saw a significant 58% increase, now representing 44% of total consolidated revenue.
  • 4The company reported a substantial increase in net income, up 199% to $558.9 million, though operating income margin remained at 7%.
  • 5Free cash flow remained significantly negative, at approximately -$2.02 billion in 2017, primarily due to large upfront investments in streaming content.
  • 6Total content liabilities (current and non-current) and streaming content obligations (including off-balance sheet commitments) represent a substantial financial commitment, exceeding $25 billion.
  • 7The company issued significant new debt in 2017, leading to long-term debt increasing from $3.36 billion to $6.50 billion, indicating reliance on debt financing for operations and content investment.

Frequently Asked Questions

Netflix's core strategy is to grow its streaming membership business globally, with a strong focus on expanding original programming. This strategy is driving significant revenue growth and international expansion, but it also requires substantial upfront investment in content, leading to negative free cash flow and an increasing reliance on debt financing. The company anticipates continued negative free cash flow for many years due to these content investments.

Key risks include intense competition from existing and new entertainment providers, the long-term and fixed cost nature of content commitments limiting operating flexibility, potential liability related to content, dependence on third-party partners for service delivery, cybersecurity threats, and risks associated with international operations such as regulatory, economic, and political factors. Additionally, the company carries a significant amount of debt, which could impact its financial flexibility and ability to service obligations.

Netflix is financing its content obligations and growth through a combination of revenue generation and significant debt issuances. As of December 31, 2017, long-term debt was approximately $6.5 billion, with substantial streaming content obligations totaling over $17.6 billion (including off-balance sheet commitments). The company anticipates financing its capital needs in the debt market and may seek additional capital through equity or debt. They do not currently pay dividends and reinvest earnings into content and growth.

The Domestic DVD segment is declining and Netflix anticipates this trend to continue. However, it still generates significant contribution profit which helps fund growth in the streaming service. The company does not plan to increase resources for this segment and the technology is not being meaningfully improved, indicating a strategic shift away from this business.