10-QPeriod: Q2 FY2013

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2013

Filed July 25, 2013For Securities:NFLX

Summary

Netflix, Inc. reported its second-quarter 2013 financial results, demonstrating robust revenue growth driven by expanding streaming memberships both domestically and internationally. Total revenues increased by 20% year-over-year to $1,069.4 million, with the domestic streaming segment showing strong performance in both revenue and contribution profit, improving its margin to 23% from 16% in the prior year. The international segment also saw significant revenue growth of 155%, though it continues to operate at a contribution loss, which narrowed by 26% year-over-year to $65.8 million due to faster revenue growth outpacing content and marketing investments. The company's strategic shift towards streaming continues to impact its DVD-by-mail business, which experienced a 20% decline in revenue. Despite this, the Domestic DVD segment maintained a high contribution margin of 47%. Financially, Netflix reported a significant increase in net income to $29.5 million, a 378% jump from the prior year's comparable quarter, partly due to the absence of a debt extinguishment loss seen in Q1 2013. Free cash flow saw a notable improvement, turning positive at $12.9 million for the quarter compared to a negative $41.5 million in the previous quarter, indicating better cash generation from operations, supported by increased revenues and managed content payments.

Financial Highlights

49 data points
Beta

Revenue

$1.07B

28.9% Gross Margin

Net Income

$29.47M

2.8% Net Margin

EPS (Diluted)

$0.01

Total Assets

$4.48B

Cash & Equivalents

$370.68M

Free Cash Flow

$25.86M

Financial Statements
Beta
Revenue$1.07B
Cost of Revenue$760.67M
Gross Profit$308.70M
R&D Expenses$93.13M
Operating Income$57.12M
Interest Expense$7.53M
Net Income$29.47M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.07B
Shares Outstanding (Diluted)4.24B

Key Highlights

  • 1Consolidated revenues grew 20% year-over-year to $1,069.4 million, driven by strong streaming membership growth.
  • 2Domestic streaming segment revenue increased 26% year-over-year, with contribution profit rising 73% and margins improving to 23%.
  • 3International streaming segment revenue surged 155% year-over-year, with contribution losses narrowing by 26% to $65.8 million.
  • 4Domestic DVD segment revenue declined 20%, but maintained a high contribution margin of 47%.
  • 5Net income more than quadrupled to $29.5 million, and diluted EPS rose to $0.49.
  • 6Free cash flow improved significantly, turning positive at $12.9 million for the quarter, up from -$41.5 million in Q1 2013.
  • 7Significant content obligations of over $6.3 billion are due within the next five years, underscoring ongoing investment in content.

Frequently Asked Questions

Netflix's revenue growth is primarily driven by the expanding number of streaming members, both domestically and internationally. The company continues to invest heavily in content, including Original content, to attract and retain subscribers for its internet television network.

Netflix is strategically shifting its focus and investments away from the Domestic DVD segment towards its streaming services. While the DVD segment is experiencing declining revenues and memberships, it continues to generate a strong contribution margin, which the company expects to maintain.

International expansion is a key growth driver, with significant revenue increases reported in the international streaming segment. However, this growth is accompanied by substantial content licensing and marketing expenses, leading to ongoing contribution losses. The company is focused on narrowing these losses by growing revenues faster than expenses as its international subscriber base expands.

Free cash flow improved significantly in Q2 2013, turning positive after a weak prior quarter. While content acquisition and licensing remain major cash outflows, the company has managed its cash effectively, aided by revenue growth and strategic debt management, including issuing new notes and redeeming older ones. Cash reserves stood at $1,080.1 million as of June 30, 2013.