10-QPeriod: Q2 FY2016

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2016

Filed July 19, 2016For Securities:NFLX

Summary

Netflix, Inc. reported strong revenue and membership growth for the second quarter of 2016, with global streaming memberships reaching over 83 million. Despite a slight dip in operating income primarily due to increased content and headcount costs, net income saw a significant increase of 55%, bolstered by foreign exchange gains and a lower effective tax rate. The company continues to invest heavily in content acquisition and original programming, which is a key driver of its growth strategy and also a significant factor in its operating expenses and cash usage. International expansion remains a major focus, with the international segment showing substantial revenue growth, though it still operates at a contribution loss. Domestic streaming performance remains robust, with improving contribution margins. The company is actively managing the phase-out of grandfathered pricing plans, which is expected to positively impact average revenue per paying membership in the coming quarters. While liquidity remains a concern due to significant content commitments, Netflix anticipates its current cash flow and available funds will be sufficient for the next twelve months, though it may seek additional capital for future content investments.

Financial Highlights

47 data points
Beta

Revenue

$2.11B

30.0% Gross Margin

Net Income

$40.76M

1.9% Net Margin

EPS (Diluted)

$0.01

Total Assets

$11.59B

Cash & Equivalents

$1.39B

Free Cash Flow

-$237.11M

Financial Statements
Beta
Revenue$2.11B
Cost of Revenue$1.53B
Gross Profit$632.11M
R&D Expenses$207.30M
Operating Income$70.37M
Interest Expense$35.45M
Net Income$40.76M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.28B
Shares Outstanding (Diluted)4.38B

Key Highlights

  • 1Global streaming memberships grew 27% year-over-year to 83.18 million.
  • 2Total revenues increased by 28% to $2.105 billion, driven by strong membership growth.
  • 3Net income surged 55% to $40.76 million, aided by a foreign exchange gain and lower taxes.
  • 4Operating income decreased by 6% to $70.37 million, largely due to increased content and personnel expenses.
  • 5International segment revenue grew by 67% to $758.2 million, with paid memberships up 57%.
  • 6The company is phasing out grandfathered pricing, expecting a 10-20% increase in average monthly revenue per paying membership by Q4 2016.
  • 7Streaming content obligations are substantial, totaling $13.19 billion, indicating significant future investment in content.

Frequently Asked Questions

Revenue growth is primarily driven by the significant increase in global streaming paid memberships, which grew by 27% year-over-year. Additionally, a 3% increase in average monthly revenue per paying membership, attributed to price adjustments and a favorable plan mix, also contributed to the revenue uplift.

Operating income saw a slight decrease of 6% due to higher content expenses, including investments in original content and licensing, as well as increased headcount costs to support global expansion. These investments are crucial for Netflix's growth strategy but impact short-term profitability.

Netflix is in the process of phasing out grandfathered pricing plans, particularly in the U.S. This is expected to increase the average monthly revenue per paying membership by 10% to 20% year-over-year by the end of Q4 2016. While there's a risk of higher cancellations or members opting for lower-tier plans, the company anticipates an overall increase in revenue from this transition.

Netflix has substantial streaming content obligations totaling $13.19 billion as of June 30, 2016. The company continues to invest heavily in original and licensed content, which requires significant upfront cash payments. While this impacts free cash flow negatively in the short term, Netflix expects operational cash flows and existing funds to cover its needs for the next twelve months, with potential for future capital raises to fund ongoing content investments.