10-QPeriod: Q1 FY2015

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2015

Filed April 17, 2015For Securities:NFLX

Summary

Netflix's Q1 2015 filing shows robust top-line growth driven by a significant increase in global streaming memberships, up 29% year-over-year to 62.3 million. Consolidated revenues grew by 24% to $1.57 billion. However, this revenue expansion was offset by substantial investments in content and international expansion, leading to a significant 55% decrease in net income to $23.7 million. Operating income remained flat year-over-year, but net income was heavily impacted by a $16.3 million increase in interest expense from new debt issuance and a $33.7 million foreign exchange loss. The company continues its aggressive international rollout, with the international segment experiencing 65% membership growth. Despite this growth, the international segment remains in a contribution loss of $65 million, primarily due to high content and marketing expenses necessary to build market share. Conversely, the domestic streaming segment demonstrated strong operational efficiency, with its contribution margin improving to 32% from 25% in the prior year, reflecting revenue growth outpacing cost increases. The domestic DVD business continues its decline, with memberships and revenues falling.

Financial Highlights

48 data points
Beta

Revenue

$1.57B

33.5% Gross Margin

Net Income

$23.70M

1.5% Net Margin

EPS (Diluted)

$0.01

Total Assets

$9.24B

Cash & Equivalents

$2.45B

Free Cash Flow

-$140.42M

Financial Statements
Beta
Revenue$1.57B
Cost of Revenue$1.05B
Gross Profit$526.73M
R&D Expenses$143.11M
Operating Income$97.46M
Interest Expense$26.74M
Net Income$23.70M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.24B
Shares Outstanding (Diluted)4.34B

Key Highlights

  • 1Global streaming memberships surged 29% to 62.3 million in Q1 2015, demonstrating continued strong user adoption.
  • 2Consolidated revenues increased by 24% to $1.57 billion, reflecting successful market penetration.
  • 3Net income saw a substantial 55% decrease to $23.7 million, significantly impacted by increased interest expenses and foreign exchange losses.
  • 4International streaming memberships grew by 65%, highlighting the company's aggressive global expansion strategy.
  • 5The domestic streaming segment achieved a significant improvement in contribution margin to 32%, indicating growing profitability in the core U.S. market.
  • 6The company's long-term streaming content obligations increased to $9.8 billion, underscoring substantial future content investment.
  • 7Free cash flow turned negative at ($163.1 million) for the quarter, driven by increased content payments and operating expenses, a shift from positive free cash flow in the prior year.

Frequently Asked Questions

Revenue growth is primarily driven by an increasing number of global streaming memberships and a slight increase in average monthly revenue per paying membership, particularly in the U.S. due to plan upgrades and price adjustments. International expansion is also a significant contributor to revenue growth.

The significant decrease in net income is attributable to several factors, including a substantial increase in interest expense related to new debt issued in February 2015, a notable foreign exchange loss of $33.7 million due to a strengthening U.S. dollar impacting international liabilities, and ongoing high investments in content acquisition and marketing for international expansion.

Netflix is aggressively expanding its streaming service into new international markets. This strategy involves significant upfront investments in content tailored for these regions and in marketing to build brand awareness and acquire subscribers. While this is driving substantial membership growth internationally (up 65%), it also leads to increased contribution losses in the international segment due to these necessary investments.

Netflix has committed to significant future content spending, with streaming content obligations totaling $9.8 billion as of March 31, 2015. The company finances these obligations through a combination of operating cash flows and debt. Significant upfront payments for content are a key factor impacting free cash flow, which was negative in this quarter.