10-QPeriod: Q3 FY2013

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2013

Filed October 25, 2013For Securities:NFLX

Summary

Netflix's third quarter 2013 results demonstrate continued strong growth in its core streaming business, with total revenues reaching $1.11 billion, a 22% increase year-over-year. This growth is primarily driven by the expanding subscriber base, both domestically and internationally, with total streaming members surpassing 40 million. The company is strategically shifting resources from its declining DVD business to invest heavily in content acquisition and marketing for its streaming services, reflecting its focus on future growth. Despite increased content costs, the domestic streaming segment saw a significant improvement in contribution margin, indicating progress in scaling the business effectively. The international segment, while still operating at a loss, is showing substantial revenue growth and a narrowing of its contribution loss, signaling positive momentum in global expansion.

Financial Highlights

49 data points
Beta

Revenue

$1.11B

27.8% Gross Margin

Net Income

$31.82M

2.9% Net Margin

EPS (Diluted)

$0.01

Total Assets

$4.90B

Cash & Equivalents

$439.06M

Free Cash Flow

$23.86M

Financial Statements
Beta
Revenue$1.11B
Cost of Revenue$798.90M
Gross Profit$307.10M
R&D Expenses$95.54M
Operating Income$57.12M
Interest Expense$7.44M
Net Income$31.82M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.14B
Shares Outstanding (Diluted)4.27B

Key Highlights

  • 1Total revenues grew 22% year-over-year to $1.11 billion in Q3 2013, driven by strong streaming member growth.
  • 2Domestic streaming segment revenue increased 26% year-over-year, with paid memberships growing 26% to 29.9 million.
  • 3International streaming segment revenue more than doubled (135% YoY growth), with paid memberships soaring 119% to 8.1 million.
  • 4Contribution margin in the Domestic streaming segment improved significantly to 24% from 17% in the prior year's quarter, showcasing improved operational efficiency.
  • 5International streaming segment contribution loss narrowed to $74.3 million, down 20% from $92.4 million in Q3 2012, indicating progress in scaling the global business.
  • 6The company made a significant change in accounting for content amortization, recognizing higher viewing in initial months and shifting to an accelerated basis, which decreased Q3 net income by $16.7 million.
  • 7Free cash flow for Q3 2013 was $7.1 million, a significant improvement from a negative $20.5 million in Q3 2012, reflecting better cash generation.

Frequently Asked Questions

The primary driver of Netflix's revenue growth in Q3 2013 is the expansion of its streaming subscriber base, both domestically and internationally. This growth is fueled by increased consumer adoption of internet television and strategic investments in content and marketing.

Netflix is strategically increasing its investment in content licensing and original content to meet subscriber demand. To manage these costs, the company is shifting focus and resources away from its declining DVD segment towards its high-growth streaming services. Furthermore, Netflix has updated its content amortization policy to a more accelerated basis, reflecting actual viewing patterns, which better aligns expenses with revenue generation, although it impacted reported net income in the current quarter.

The international streaming segment is experiencing rapid revenue growth, more than doubling year-over-year, and its contribution loss has significantly decreased. While still operating at a loss, this indicates positive traction and improved efficiency as the subscriber base expands, suggesting a path towards profitability in the long term.

The change to an accelerated amortization method for certain content, reflecting higher initial viewing, resulted in a $20.2 million decrease in contribution profit for the domestic streaming segment and a $6.5 million increase in contribution loss for the international segment in Q3 2013. On a consolidated basis, this change reduced operating income by $26.7 million and net income by $16.7 million for the quarter.