10-QPeriod: Q2 FY2014

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2014

Filed July 22, 2014For Securities:NFLX

Summary

Netflix Inc. reported strong financial performance for the second quarter ended June 30, 2014, driven by robust subscriber growth in both its domestic and international streaming segments. Total revenues increased by 25% year-over-year, reaching $1.34 billion. This growth was propelled by a 23% increase in domestic paid memberships and a significant 84% surge in international paid memberships, reflecting successful global expansion. Profitability saw a substantial boost, with operating income up 127% and net income more than doubling to $71 million. The company's strategic focus on expanding its streaming content, particularly original programming, and its ongoing international rollout appear to be resonating with consumers. While content licensing expenses increased to support this growth, it was outpaced by revenue increases, leading to improved contribution margins in the streaming segments. The domestic DVD business continued its decline, as expected, with revenues decreasing by 16%, but maintained a high contribution margin. Netflix's proactive approach to pricing adjustments, including a recent increase for new domestic subscribers, and its continued investment in technology and development signal a commitment to sustaining its growth trajectory in the evolving media landscape.

Financial Highlights

49 data points
Beta

Revenue

$1.34B

31.7% Gross Margin

Net Income

$71.02M

5.3% Net Margin

EPS (Diluted)

$0.02

Total Assets

$6.33B

Cash & Equivalents

$1.21B

Free Cash Flow

$36.16M

Financial Statements
Beta
Revenue$1.34B
Cost of Revenue$914.85M
Gross Profit$425.56M
R&D Expenses$115.18M
Operating Income$129.60M
Interest Expense$13.33M
Net Income$71.02M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)4.20B
Shares Outstanding (Diluted)4.31B

Key Highlights

  • 1Total revenue grew 25% year-over-year to $1.34 billion, driven by strong subscriber additions.
  • 2Net income more than doubled, increasing 141% to $71 million, indicating significant operational leverage.
  • 3Domestic streaming paid members increased by 23%, with average revenue per member rising 2% to $8.04, aided by recent price adjustments.
  • 4International streaming paid members surged 84% to 12,907, showing accelerating global adoption and narrowing contribution losses.
  • 5Content licensing expenses increased significantly to support content expansion, a key driver of growth but also a major cost.
  • 6The domestic DVD segment continued its decline, with paid members down 16%, reflecting the ongoing shift to streaming.
  • 7Technology and development expenses increased 24% as the company invests in service improvements and international expansion.

Frequently Asked Questions

Netflix's revenue growth is primarily driven by its expanding streaming subscriber base, both domestically and internationally. In Q2 2014, domestic paid memberships grew by 23% and international paid memberships saw an impressive 84% increase. This growth was further supported by a slight increase in average monthly revenue per paying member due to recent pricing adjustments for new subscribers.

Netflix is experiencing higher content licensing expenses as it invests heavily in acquiring and producing more streaming content, including original series. While these costs are rising, the company's revenue growth from subscriber additions has outpaced the increase in these costs, leading to improved contribution margins in the streaming segments. The company's strategy emphasizes that these investments are crucial for maintaining its competitive edge and driving subscriber acquisition and retention.

The domestic DVD-by-mail segment continues to decline, as evidenced by a 16% decrease in paid members and a 16% drop in revenue compared to the prior year. While this segment remains profitable with a high contribution margin (48%), the company's strategic focus and resource allocation are clearly shifting towards the streaming business, indicating a long-term trend of decreased importance for the DVD service.

Netflix is heavily investing in several key areas for future growth: 1) Expanding its streaming content library, with a particular focus on original programming. 2) Accelerating international expansion, with plans for new market launches in Europe during Q3 2014. 3) Enhancing its technology and development infrastructure to improve the user experience and support increased streaming volume. These investments are reflected in higher content licensing, marketing, and technology expenses.