10-QPeriod: Q3 FY2015

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2015

Filed October 16, 2015For Securities:NFLX

Summary

Netflix's Q3 2015 10-Q filing reveals continued strong growth in global streaming memberships, which surged by 30% year-over-year to 69.2 million. This membership expansion fueled a 23% increase in consolidated revenues to $1.74 billion. However, profitability faced headwinds, with operating income declining 33% and net income falling 50% year-over-year. This was primarily driven by significant investments in content and international expansion, coupled with a substantial increase in interest expense due to new debt issuance. The company continues to aggressively pursue its global streaming strategy, emphasizing content acquisition and original programming. While revenue growth remains robust, investors should note the increasing costs associated with this expansion. The international segment, though growing rapidly in memberships (up 64%), is still operating at a contribution loss, exacerbated by foreign currency fluctuations. The domestic DVD business continues its decline, with memberships and revenues decreasing.

Financial Highlights

47 data points
Beta

Revenue

$1.74B

32.5% Gross Margin

Net Income

$29.43M

1.7% Net Margin

EPS (Diluted)

$0.01

Total Assets

$9.92B

Cash & Equivalents

$2.12B

Free Cash Flow

-$233.79M

Financial Statements
Beta
Revenue$1.74B
Cost of Revenue$1.17B
Gross Profit$564.40M
R&D Expenses$171.76M
Operating Income$73.64M
Interest Expense$35.33M
Net Income$29.43M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.27B
Shares Outstanding (Diluted)4.38B

Key Highlights

  • 1Global streaming memberships grew 30% year-over-year to 69.2 million, driving a 23% increase in consolidated revenues to $1.74 billion for Q3 2015.
  • 2Despite revenue growth, operating income decreased by 33% and net income by 50% year-over-year, attributed to increased content costs, international expansion, and higher interest expenses.
  • 3International streaming memberships saw substantial growth of 64% to 26.0 million, but the segment reported a contribution loss of $67.6 million for the quarter.
  • 4Average monthly revenue per paying membership in the domestic segment increased by 4% to $8.53 due to pricing changes and plan mix.
  • 5Technology and Development expenses rose 42% to $171.8 million, reflecting investments in service improvements and international expansion.
  • 6General and Administrative expenses increased by 42% to $110.9 million, largely due to headcount growth supporting international and original content initiatives.
  • 7The company's total streaming content obligations (current and non-current, plus unreflected future commitments) stand at a substantial $10.4 billion, with significant future commitments expected.
  • 8Free cash flow for Q3 2015 was negative at $(252.0) million, an increase in cash burn compared to the prior year's $(73.7) million, largely due to higher content cash payments over expense.

Frequently Asked Questions

Netflix is significantly increasing its expenses to fuel its global expansion and its strategy of investing heavily in exclusive and original content. Technology and development costs are rising due to investments in improving the streaming service, recommendation engines, and supporting international infrastructure. Content costs are increasing due to the acquisition of new licenses and the production of original series and films, which are crucial for attracting and retaining subscribers worldwide.

While international expansion is driving substantial membership growth (up 64% year-over-year in Q3 2015), it is currently a drag on profitability. The international segment reported a contribution loss of $67.6 million for the quarter. This is due to higher relative investments in content and marketing to establish a presence in new markets, as well as negative impacts from foreign currency exchange rate fluctuations and the absorption of higher VAT rates in European markets. The company anticipates continued significant investment in international markets.

The substantial decrease in net income is a result of several factors, primarily driven by strategic investments. Increased operating expenses related to content acquisition and international expansion, coupled with a significant rise in interest expense (up 162%) due to newly issued debt, more than offset the revenue gains. Additionally, a change in accounting for certain content amortization also increased cost of revenues. These factors collectively impacted the bottom line despite a 23% increase in overall revenue.

Netflix has substantial future streaming content obligations totaling $10.4 billion as of September 30, 2015, with an estimated $3 billion to $5 billion in additional obligations for unknown future titles. A significant portion of these obligations, particularly upfront cash payments for content licensing and production, impact free cash flow. The company's free cash flow was negative in Q3 2015, largely due to these content payments exceeding recognized expenses. This highlights a key cash usage that investors should monitor, as it represents a significant commitment of future capital.