10-QPeriod: Q1 FY2017

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2017

Filed April 20, 2017For Securities:NFLX

Summary

Netflix reported a strong first quarter in 2017, demonstrating robust global streaming membership growth and significant improvements in profitability. The company's strategic focus on expanding its global streaming presence, coupled with investments in original content, is yielding substantial revenue and income increases. Key financial metrics show impressive year-over-year growth, highlighting the company's successful execution of its growth strategy and its increasing dominance in the internet television market. While the company continues to invest heavily in content acquisition and production, which drives up costs and free cash flow usage, the substantial increase in revenue and operating income, particularly from the international segment, signals a positive trajectory. Investors should monitor the company's ability to manage its growing content obligations and maintain its impressive growth in paid memberships and average revenue per member, especially in international markets where expansion is a key focus.

Financial Highlights

46 data points
Beta

Revenue

$2.64B

34.0% Gross Margin

Net Income

$178.22M

6.8% Net Margin

EPS (Diluted)

$0.04

Total Assets

$14.36B

Cash & Equivalents

$1.08B

Free Cash Flow

-$396.38M

Financial Statements
Beta
Revenue$2.64B
Cost of Revenue$1.74B
Gross Profit$895.90M
R&D Expenses$257.11M
Operating Income$256.94M
Interest Expense$46.74M
Net Income$178.22M
EPS (Basic)$0.04
EPS (Diluted)$0.04
Shares Outstanding (Basic)4.31B
Shares Outstanding (Diluted)4.45B

Key Highlights

  • 1Global streaming memberships surged by 21% to 98.7 million by the end of Q1 2017, indicating strong subscriber acquisition.
  • 2Revenue grew an impressive 35% year-over-year to $2.64 billion, driven by both increased membership and higher average revenue per paying member ($9.14, up 12%).
  • 3Global operating income saw a remarkable 420% increase to $256.9 million, with the operating margin expanding significantly to 9.7% from 2.5% in the prior year.
  • 4Net income more than quintupled, rising 544% to $178.2 million, reflecting strong operational leverage.
  • 5The international streaming segment experienced substantial revenue growth of 61% and turned profitable, posting a $42.7 million contribution profit, a significant turnaround from a $104.2 million loss in Q1 2016.
  • 6Despite strong revenue growth, free cash flow remained negative at $(422.5) million, primarily due to significant upfront investments in streaming content acquisition and production.
  • 7Streaming content obligations, representing future commitments for content, increased to $15.3 billion, highlighting the company's ongoing substantial investment in its content library.

Frequently Asked Questions

Netflix's revenue growth in Q1 2017 was primarily driven by an increase in the average number of paid streaming memberships globally, with a significant contribution from international expansion. Additionally, price changes and a favorable plan mix led to an increase in the average monthly revenue per paying membership.

The international streaming segment showed remarkable improvement, with revenues increasing by 61% and, critically, it became profitable for the first time in Q1 2017, reporting a $42.7 million contribution profit, a substantial swing from a $104.2 million loss in the same quarter of 2016. This turnaround was fueled by a 45% growth in paid international memberships and higher average revenue per member.

Netflix's aggressive investment in acquiring, licensing, and producing content, particularly original programming, significantly impacts its free cash flow. In Q1 2017, free cash flow was negative at $(422.5) million, primarily due to substantial upfront cash payments for streaming content assets that exceeded content amortization expenses. The company anticipates continued negative free cash flow for 'many years' due to these ongoing investments.

Netflix has substantial streaming content obligations totaling $15.3 billion as of March 31, 2017, an increase from the previous quarter due to multi-year commitments for exclusive and original programming. These obligations are largely unfunded on the balance sheet until content is made available. The company relies on a combination of operating cash flows, available funds, and potential future financing to meet these ongoing commitments.