10-QPeriod: Q2 FY2011

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2011

Filed July 27, 2011For Securities:NFLX

Summary

Netflix, Inc. (NFLX) reported strong revenue growth of 51.7% year-over-year for the second quarter of 2011, reaching $788.6 million. This growth was primarily driven by a significant increase in paying subscribers, up 58.4% in the domestic market. Despite subscriber growth, average monthly revenue per paying subscriber saw a slight decline due to the increasing popularity of lower-priced plans. The company is actively investing in its streaming content library, with additions to the streaming content library increasing substantially compared to the prior year. While gross profit margins remain healthy, operating expenses, particularly in technology and development and general and administrative areas, also saw significant increases, impacting operating income growth. The company is also navigating a strategic shift towards separating its DVD and streaming services, which could impact future revenue streams and subscriber behavior. Financially, Netflix demonstrated robust operating cash flow generation, up 43.4% year-over-year. However, the company's balance sheet shows a substantial increase in current liabilities, primarily driven by accounts payable related to content licensing, indicating significant upcoming content obligations. Despite a considerable increase in current content library assets, the company's cash position saw a slight decrease sequentially. Netflix's strategic investments in content and international expansion are key factors influencing its financial trajectory, alongside its ongoing stock repurchase program.

Financial Highlights

46 data points
Beta

Revenue

$788.61M

37.9% Gross Margin

Net Income

$68.21M

8.6% Net Margin

EPS (Diluted)

$0.02

Total Assets

$1.57B

Cash & Equivalents

$175.21M

Free Cash Flow

$77.77M

Financial Statements
Beta
Revenue$788.61M
Cost of Revenue$489.98M
Gross Profit$298.63M
R&D Expenses$57.87M
Operating Expenses$183.52M
Operating Income$115.11M
Interest Expense$5.30M
Net Income$68.21M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)3.67B
Shares Outstanding (Diluted)3.77B

Key Highlights

  • 1Revenue increased by 51.7% to $788.6 million in Q2 2011 compared to Q2 2010, driven by a 58.4% increase in domestic paying subscribers.
  • 2Net income grew by 56.7% to $68.2 million, with diluted EPS increasing to $1.26 from $0.80.
  • 3Total subscribers grew significantly by 70.4% year-over-year, reaching 25.56 million by the end of Q2 2011.
  • 4The company's content library, particularly for streaming, saw a substantial increase in investment, with additions to the streaming content library rising significantly.
  • 5Operating expenses increased across technology and development, marketing, and general and administrative categories, with G&A expenses more than doubling year-over-year.
  • 6Netflix is strategically separating its DVD and streaming services, launching new plans that offer streaming-only or DVD-only options, which could impact revenue models and subscriber choices.
  • 7Free cash flow increased by 74.0% year-over-year, indicating strong operational cash generation despite significant content investments.

Frequently Asked Questions

Netflix's primary growth driver remains the expansion of its subscriber base, particularly in its streaming service, both domestically and internationally. The company believes that increased subscriber numbers lead to further content acquisition, which in turn attracts more subscribers.

Netflix is significantly increasing its investment in streaming content, as evidenced by the substantial rise in 'additions to streaming content library' and 'cost of subscription.' This includes licensing agreements for new content, which also contributes to a significant increase in accounts payable and other non-current liabilities related to content obligations.

Netflix has introduced separate plans for DVD-only and streaming-only services, and subscribers wanting both will pay for each separately. This strategic shift aims to focus on streaming growth but could lead to subscriber attrition if customers do not adapt to the new pricing structure or the separated offerings. The company will report the DVD division as a separate segment starting in Q4 2011.

Netflix generated strong operating cash flow, which increased significantly year-over-year. While the company has substantial content commitments and growing liabilities related to content licensing, its overall liquidity appears sufficient to meet its operational needs and strategic investments, including international expansion and stock repurchases.