Summary
Netflix's third quarter of 2012 demonstrated continued growth in its core streaming business, both domestically and internationally, despite a decline in its legacy DVD-by-mail service. Consolidated revenues saw a modest 2% increase quarter-over-quarter and a 10% increase year-over-year, driven primarily by the robust expansion of its streaming subscriber base. However, significant investments in international expansion and content acquisition, particularly original programming, are impacting profitability, leading to a substantial year-over-year decrease in net income and a negative free cash flow for the quarter.
Financial Highlights
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Financial Statements
Beta
| Revenue | $905.09M |
| Cost of Revenue | $662.64M |
| Gross Profit | $242.45M |
| R&D Expenses | $82.52M |
| Operating Expenses | $226.32M |
| Operating Income | $16.14M |
| Interest Expense | $4.99M |
| Net Income | $7.67M |
| EPS (Basic) | $0.00 |
| EPS (Diluted) | $0.00 |
| Shares Outstanding (Basic) | 3.89B |
| Shares Outstanding (Diluted) | 4.11B |
Key Highlights
- 1Consolidated revenues increased by 10% year-over-year to $905.1 million, primarily fueled by strong growth in domestic and international streaming subscriptions.
- 2Domestic streaming paid subscriptions grew to 23.8 million, adding 1.16 million net new subscribers in Q3 2012.
- 3International streaming paid subscriptions reached 3.69 million, a significant increase of 19% from the prior quarter, indicating successful global expansion.
- 4The company reported a net income of $7.7 million, a substantial decrease of 88% compared to $62.5 million in the same quarter last year, due to increased content and marketing investments.
- 5Free cash flow turned negative at ($20.5) million for the quarter, a significant decline from positive $13.8 million in Q3 2011, driven by higher content payments and investments in infrastructure.
- 6The Domestic DVD segment continues to decline, with net losses of 634,000 subscribers in the quarter, although revenue contribution remains significant at $271.3 million.
- 7Significant future streaming content obligations are noted, with over $4.9 billion due within the next five years, highlighting substantial future investment requirements.
Frequently Asked Questions
Revenue growth is primarily driven by the increasing number of paid streaming subscriptions, both domestically and internationally. While the domestic streaming segment continues to expand, the international segment shows particularly strong growth momentum, fueled by recent market launches.
The significant decrease in net income is largely due to substantial investments in expanding the streaming service globally, acquiring more content (including original programming), and increased marketing efforts to support international growth. These investments are ahead of revenue recognition in some cases, impacting short-term profitability.
The company anticipates that free cash flow will continue to be negatively impacted by ongoing investments in new international markets and original content. Higher upfront cash payments for original programming are also expected to put pressure on free cash flow in the near future.
The company views the DVD-by-mail service as a fading differentiator, with its core strategy focused on growing the streaming subscription business. While the DVD segment still contributes revenue, it is experiencing declining subscriber numbers and is no longer a primary focus for investment.