10-KPeriod: FY2019

NETFLIX INC Annual Report, Year Ended Dec 31, 2019

Filed January 29, 2020For Securities:NFLX

Summary

Netflix, Inc. (NFLX) reported strong revenue growth in 2019, driven by a 28% increase to $20.16 billion, up from $15.79 billion in 2018. This growth was fueled by a 23% increase in average paying memberships and a 5% rise in average monthly revenue per paying member, reflecting successful pricing strategies and plan mix adjustments. The company significantly improved its operating margin to 13% in 2019 from 10% in 2018, signaling enhanced profitability. Despite substantial investments in content, which led to negative free cash flow of approximately $3.27 billion in 2019, Netflix demonstrated a robust expansion in its subscriber base, reaching over 167 million global paid memberships by year-end. The company continued to invest heavily in content acquisition and production, a core strategy for attracting and retaining members in a highly competitive streaming market. However, this aggressive content spending, coupled with a substantial debt load of approximately $14.9 billion as of December 31, 2019, highlights ongoing financial risks and the need for continuous revenue growth to service these obligations.

Financial Highlights

50 data points
Beta

Revenue

$20.16B

38.3% Gross Margin

Net Income

$1.87B

9.3% Net Margin

EPS (Diluted)

$0.41

Total Assets

$33.98B

Cash & Equivalents

$5.04B

Free Cash Flow

-$3.14B

Financial Statements
Beta
Revenue$20.16B
Cost of Revenue$12.44B
Gross Profit$7.72B
R&D Expenses$1.67B
Operating Income$2.60B
Interest Expense$626.02M
Net Income$1.87B
EPS (Basic)$0.43
EPS (Diluted)$0.41
Shares Outstanding (Basic)4.38B
Shares Outstanding (Diluted)4.52B

Key Highlights

  • 1Revenue increased by 28% to $20.16 billion in 2019, up from $15.79 billion in 2018, driven by membership growth and increased average revenue per user.
  • 2Operating margin improved significantly to 13% in 2019, up from 10% in 2018, indicating enhanced profitability.
  • 3Global paid streaming memberships grew by 20% to 167.09 million by the end of 2019, showcasing continued subscriber acquisition success.
  • 4Free cash flow remained negative at approximately $(3.27) billion for 2019, a slight increase from $(3.02) billion in 2018, primarily due to significant investments in content.
  • 5Long-term debt increased substantially to $14.76 billion as of December 31, 2019, up from $10.36 billion in 2018, reflecting continued reliance on debt financing for content and operations.
  • 6The company operates as a single global segment, with the CEO reviewing performance on a consolidated basis, indicating a unified strategic approach to its operations.
  • 7Content assets grew significantly to $24.5 billion by year-end 2019, underscoring the substantial investment in building its content library.

Frequently Asked Questions

Netflix is primarily funding its content investments through a combination of operating revenues and, significantly, through debt financing. The company's long-term debt increased substantially to approximately $14.9 billion as of December 31, 2019. They also anticipate continuing to finance future capital needs in the debt market, indicating a reliance on external financing to support their content strategy and growth.

Netflix faces intense competition from various entertainment video providers, including other streaming services, traditional distributors, and piracy-based offerings. A key risk is the 'long-term and fixed cost nature of content commitments,' which can limit operating flexibility and adversely affect liquidity if membership growth doesn't meet expectations. The company also faces risks related to unforeseen costs and potential liability in connection with the content it acquires, produces, licenses, and distributes, especially with its increasing focus on original programming.

Netflix's international operations expose it to various economic, political, and regulatory risks. These include the need to adapt content and interfaces for cultural and language differences, compliance with diverse local laws (including anti-corruption and data privacy), potential government actions impacting service availability, foreign currency exchange rate fluctuations (which they do not hedge), and challenges with differing payment processing systems and consumer payment preferences. The company also faces risks related to censorship requirements and varying attitudes towards piracy in different regions.

Netflix's core strategy is to grow its global streaming membership business within the parameters of its operating margin target. Revenue growth is driven by increasing the number of paid memberships and optimizing average monthly revenue per paying member through strategic pricing adjustments and plan mix. The company aims to improve profitability by managing content costs effectively while continuing to expand its subscriber base and enhance its service.