10-QPeriod: Q1 FY2013

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2013

Filed April 26, 2013For Securities:NFLX

Summary

Netflix reported solid top-line growth in the first quarter of 2013, with consolidated revenues increasing 18% year-over-year to over $1 billion, driven by strong subscriber expansion in both its domestic and international streaming segments. The company demonstrated improving profitability in its domestic streaming operations, with contribution margin increasing to 21% from 14% in the prior year quarter, reflecting revenue growth outpacing content and marketing spend. While the international segment continues to incur contribution losses, these losses narrowed by 25% year-over-year, indicating progress in scaling its global operations. Despite the positive revenue and domestic segment performance, Netflix experienced a net loss for the quarter, largely due to a significant $25.1 million loss on extinguishment of debt related to early redemption of senior notes. Free cash flow also remained negative at -$41.5 million, primarily due to substantial cash payments for content acquisitions, particularly for original programming. The company bolstered its liquidity by issuing $500 million in senior notes, though it also used a portion of these proceeds to redeem existing debt. Investors should monitor the company's ability to manage its significant streaming content obligations, which stand at over $5.6 billion, and its path to positive free cash flow as it continues to invest heavily in global expansion and content.

Financial Highlights

48 data points
Beta

Revenue

$1.02B

28.0% Gross Margin

Net Income

$2.69M

0.3% Net Margin

EPS (Diluted)

$0.00

Total Assets

$4.36B

Cash & Equivalents

$418.05M

Free Cash Flow

-$24.37M

Financial Statements
Beta
Revenue$1.02B
Cost of Revenue$736.95M
Gross Profit$287.01M
R&D Expenses$91.97M
Operating Income$31.82M
Interest Expense$6.74M
Net Income$2.69M
EPS (Basic)$0.00
EPS (Diluted)$0.00
Shares Outstanding (Basic)3.92B
Shares Outstanding (Diluted)4.21B

Key Highlights

  • 1Consolidated revenues grew 18% year-over-year to $1.02 billion.
  • 2Domestic streaming segment revenue increased 26% year-over-year, with paid members up 27%.
  • 3Domestic streaming contribution margin improved significantly to 21% from 14% in Q1 2012.
  • 4International streaming revenue surged 227% year-over-year, though the segment reported a contribution loss of $76.9 million.
  • 5Net loss of $2.7 million reported, impacted by a $25.1 million loss on extinguishment of debt.
  • 6Free cash flow was negative at ($41.5 million) due to significant content payments.
  • 7Issued $500 million in 5.375% Senior Notes, increasing cash reserves to $1.03 billion.
  • 8Total streaming content obligations are substantial, amounting to over $5.6 billion.

Frequently Asked Questions

Netflix reported strong subscriber growth in Q1 2013. The domestic streaming segment added 2.03 million net members, bringing its total to 29.17 million. The international segment added 1.02 million net members, reaching 7.14 million. While domestic growth is solid, international growth is accelerating rapidly, with paid members up 163% year-over-year. The company expects both segments to continue growing.

Profitability is improving in the domestic streaming segment, with its contribution margin increasing to 21% due to revenue growth outpacing cost increases. However, the international segment continues to generate contribution losses as it invests heavily in market expansion and content. Overall net income for the quarter was impacted by a significant loss on debt extinguishment. Free cash flow remains negative due to large upfront payments for content licensing.

Netflix strengthened its financial position by issuing $500 million in new 5.375% Senior Notes in February 2013. This financing, along with existing cash reserves, is intended to fund ongoing content acquisition, particularly for original programming, and continued international expansion. The company has over $5.6 billion in streaming content obligations, indicating a significant future commitment to content.

The domestic DVD-by-mail segment continues to decline. Revenues decreased 24% year-over-year in Q1 2013, reflecting a 24% drop in paid memberships. While this segment maintains a high contribution margin (47%), it is being de-emphasized as Netflix focuses its investments on streaming growth.