10-QPeriod: Q2 FY2012

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2012

Filed August 2, 2012For Securities:NFLX

Summary

Netflix, Inc. reported its second-quarter 2012 financial results, demonstrating a return to profitability after a first-quarter loss, though revenue growth was modest. Consolidated revenues saw a 2% sequential increase, reaching $889.2 million, while net income swung from a loss of $4.6 million in Q1 2012 to a profit of $6.2 million in Q2 2012. This improvement was largely driven by lower marketing expenses, particularly in the international segment, and a recovery in the domestic streaming contribution margin. The company continues its strategic pivot towards global streaming expansion, with international revenues showing significant year-over-year growth (244%). However, this international growth comes at the cost of substantial contribution losses in the International Streaming segment, which are expected to continue as Netflix invests heavily in content and market penetration. Despite a decline in domestic DVD subscriptions, the overall unique subscriber base grew, signaling ongoing transition to the streaming model. Investors should closely monitor the profitability of the international segment and the company's ability to manage content acquisition costs amidst aggressive global expansion.

Financial Highlights

50 data points
Beta

Revenue

$889.16M

27.6% Gross Margin

Net Income

$6.16M

0.7% Net Margin

EPS (Diluted)

$0.00

Total Assets

$3.48B

Cash & Equivalents

$402.25M

Free Cash Flow

$16.05M

Financial Statements
Beta
Revenue$889.16M
Cost of Revenue$643.43M
Gross Profit$245.74M
R&D Expenses$81.55M
Operating Expenses$229.58M
Operating Income$16.15M
Interest Expense$5.01M
Net Income$6.16M
EPS (Basic)$0.00
EPS (Diluted)$0.00
Shares Outstanding (Basic)3.89B
Shares Outstanding (Diluted)4.12B

Key Highlights

  • 1Consolidated revenues grew 2% sequentially to $889.2 million, and 13% year-over-year.
  • 2Net income returned to positive territory with $6.2 million in Q2 2012, a significant improvement from a $4.6 million loss in Q1 2012.
  • 3International streaming revenues surged by 244% year-over-year, driven by recent market launches, although the segment reported a substantial contribution loss of $89.4 million.
  • 4Domestic streaming segment contribution margin improved to 16% from 13% in the prior quarter, indicating a more efficient streaming operation domestically.
  • 5Domestic DVD subscriptions continued their decline, down 8% sequentially, while streaming subscriptions showed growth across both domestic and international segments.
  • 6Free cash flow increased sequentially to $11.2 million, but was significantly down year-over-year by 81% due to higher content payments.
  • 7The company highlighted substantial future streaming content obligations totaling over $5 billion, indicating significant upcoming investment.

Frequently Asked Questions

Netflix's core strategy is to grow its streaming subscription business both domestically and globally. Revenue growth is primarily driven by increasing subscriber additions to the streaming service, as evidenced by the significant year-over-year increase in international streaming revenues and the sequential growth in domestic streaming revenue.

The company is actively shifting resources and focus from its declining domestic DVD segment to its growing streaming segments. While this transition leads to decreased revenue and contribution profit from DVD services, it is enabling significant investment in streaming content and international expansion. The international segment, while growing rapidly in revenue, is incurring substantial contribution losses due to these investments.

Netflix has significant future financial commitments, primarily related to streaming content obligations, which totaled over $5 billion as of June 30, 2012. These include licensing agreements for content that has not yet been recognized on the balance sheet, indicating substantial ongoing investment required to fuel the streaming service's growth.

While the company returned to profitability in Q2 2012, driven by cost management (particularly marketing), the aggressive international expansion and associated content investments are expected to result in future consolidated net losses. Management anticipates that these investments may negatively impact operating cash flows and potentially lead to the use of cash for the full year 2012.