10-QPeriod: Q2 FY2018

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 18, 2018For Securities:NFLX

Summary

Netflix reported robust financial performance for the second quarter of 2018, with significant year-over-year growth across key metrics. Total revenues surged by 40%, driven by a substantial 25% increase in global streaming memberships, reaching over 130 million. This growth was particularly strong internationally, which now constitutes 49% of consolidated revenue, highlighting the company's successful global expansion. Profitability also saw a dramatic improvement, with global operating income jumping 262% and net income increasing by 486%, indicating improved operational efficiency and pricing strategies. The company continues to heavily invest in content, with streaming content obligations escalating to $18.4 billion, underscoring its strategy of expanding original and licensed programming. While this investment drives membership growth and revenue, it also contributes to significant negative free cash flow, projected to continue for many years. Despite substantial debt, the company maintains sufficient liquidity through operations, available funds, and financing sources to meet its obligations for at least the next twelve months, signaling confidence in its ongoing growth trajectory.

Financial Highlights

46 data points
Beta

Revenue

$3.91B

38.5% Gross Margin

Net Income

$384.35M

9.8% Net Margin

EPS (Diluted)

$0.08

Total Assets

$22.66B

Cash & Equivalents

$3.91B

Free Cash Flow

-$545.56M

Financial Statements
Beta
Revenue$3.91B
Cost of Revenue$2.40B
Gross Profit$1.50B
R&D Expenses$299.10M
Operating Income$462.21M
Interest Expense$101.61M
Net Income$384.35M
EPS (Basic)$0.09
EPS (Diluted)$0.08
Shares Outstanding (Basic)4.35B
Shares Outstanding (Diluted)4.52B

Key Highlights

  • 1Global streaming memberships increased by 25% year-over-year to 130.14 million as of June 30, 2018.
  • 2Consolidated revenues grew 40% to $3.91 billion in Q2 2018 compared to the prior year.
  • 3Global operating income saw a dramatic increase of 262%, reaching $462.2 million, with the operating margin expanding to 11.8%.
  • 4Net income more than quintupled, rising 486% to $384.3 million.
  • 5International streaming revenue grew by 65% and now represents 49% of total consolidated revenue, demonstrating strong global subscriber adoption.
  • 6Average monthly revenue per paying membership increased by 13% globally, driven by price adjustments and a shift towards higher-tier plans.
  • 7Total streaming content obligations stand at $18.4 billion, reflecting substantial ongoing investment in content acquisition and production.

Frequently Asked Questions

The substantial increase in revenue is primarily driven by strong global streaming membership growth, up 25% year-over-year, and an increase in average monthly revenue per paying membership by 13%, attributed to price adjustments and a shift towards higher-priced plans. This top-line growth, combined with improved operating efficiencies, led to a dramatic increase in global operating income (up 262%) and net income (up 486%).

Netflix is primarily funding its extensive content investments through a combination of operating cash flow, existing cash reserves, and access to financing. The company issued additional debt in April 2018 and anticipates continuing to finance future capital needs through the debt market, believing its after-tax cost of debt is lower than its cost of equity.

Netflix has significant international operations, with foreign revenues and expenses denominated in currencies other than the U.S. dollar. Fluctuations in exchange rates can impact reported revenues and profits. For instance, in the six months ended June 30, 2018, international revenues would have been approximately $179.3 million lower without favorable foreign currency exchange rate movements. The company also recognized a foreign exchange gain of $58.1 million in Q2 2018, primarily from the remeasurement of its euro-denominated senior notes.

Netflix expects to continue generating negative free cash flow for many years due to significant ongoing investments in global streaming content, particularly original content, which requires substantial upfront cash payments. While net cash used in operating activities for Q2 2018 improved year-over-year, the overall free cash flow remains negative due to large content payments exceeding amortization.