10-QPeriod: Q1 FY2016

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2016

Filed April 20, 2016For Securities:NFLX

Summary

Netflix's first quarter 2016 report highlights significant global streaming membership growth, reaching over 81 million members worldwide. While total revenues saw a substantial 24% increase year-over-year, driven largely by international expansion, operating income declined by 49%. This decrease was primarily attributed to increased investments in content acquisition, licensing, and production of original series, alongside higher personnel costs associated with international growth. Despite the dip in operating income, net income saw a modest 17% increase, boosted by a significant foreign exchange gain stemming from the strengthening euro and remeasurement of foreign currency-denominated content liabilities. The company continues its aggressive content spending strategy, with streaming content obligations escalating to over $12.3 billion, underscoring a commitment to global expansion and original programming, which is expected to weigh on free cash flow in the near term.

Financial Highlights

47 data points
Beta

Revenue

$1.96B

30.0% Gross Margin

Net Income

$27.66M

1.4% Net Margin

EPS (Diluted)

$0.01

Total Assets

$11.26B

Cash & Equivalents

$1.61B

Free Cash Flow

-$237.01M

Financial Statements
Beta
Revenue$1.96B
Cost of Revenue$1.42B
Gross Profit$588.20M
R&D Expenses$203.51M
Operating Income$49.45M
Interest Expense$35.54M
Net Income$27.66M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.28B
Shares Outstanding (Diluted)4.38B

Key Highlights

  • 1Global streaming memberships grew by 31% year-over-year to 81.5 million as of March 31, 2016.
  • 2Total revenues increased by 24% to $1.96 billion, primarily fueled by international streaming membership growth.
  • 3Operating income decreased by 49% to $49.5 million, reflecting increased content and personnel expenses for international expansion.
  • 4Net income rose 17% to $27.7 million, aided by a $24.1 million foreign exchange gain.
  • 5Domestic streaming contribution margin improved to 36% from 32%, demonstrating improving profitability in the core U.S. market.
  • 6International streaming segment revenues grew 57%, but the contribution loss widened to $104.2 million due to aggressive spending.
  • 7Total streaming content obligations (including unbilled) reached $12.3 billion, a significant increase driven by original content investments.

Frequently Asked Questions

Revenue growth is primarily driven by the significant increase in global streaming memberships, particularly within the international segment, reflecting Netflix's expansion as a global Internet TV network. Higher average monthly revenue per paying membership in the domestic segment also contributed, largely due to price changes and plan mix.

Operating income decreased due to substantial investments in content acquisition, licensing, and original programming production, which are key to the company's global growth strategy. Additionally, increased headcount costs to support international expansion also impacted operating income.

Foreign currency fluctuations have a mixed impact. In Q1 2016, a strengthening euro and remeasurement of content liabilities led to a significant foreign exchange gain of $24.1 million, boosting net income. However, unfavorable foreign currency movements also negatively impacted the average monthly revenue per paying membership in the international segment, reducing it by 5% in U.S. dollar terms.

Netflix plans to significantly increase investments in global streaming content, especially original content. This strategy requires substantial upfront cash payments and is expected to lead to further negative free cash flows in the near term, even as the company aims for global profitability. The total streaming content obligations have ballooned to over $12.3 billion, highlighting the scale of these commitments.