10-QPeriod: Q2 FY2019

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 19, 2019For Securities:NFLX

Summary

Netflix reported robust revenue growth of 26% year-over-year for the second quarter of 2019, reaching $4.92 billion. This was primarily driven by a 22% increase in global paid streaming memberships, totaling over 151 million. The international segment continues to be the primary growth engine, with revenues up 33% and now representing 53% of total streaming revenue, outpacing domestic growth. Despite revenue strength, net income saw a significant decline of 30% to $270.65 million, largely influenced by increased content spending and a higher effective tax rate. While the company added 2.7 million net paid memberships globally, this was a 50% decrease compared to the prior year's Q2. This slowdown in net adds, particularly in the domestic market where net adds were negative, warrants investor attention. The company's strategy remains focused on global membership growth within operating margin targets, fueled by significant investments in content. However, free cash flow remains negative, driven by substantial upfront payments for content production and licensing, which is a key factor for investors to monitor given the ongoing substantial content obligations.

Financial Highlights

46 data points
Beta

Revenue

$4.92B

38.9% Gross Margin

Net Income

$270.65M

5.5% Net Margin

EPS (Diluted)

$0.06

Total Assets

$30.17B

Cash & Equivalents

$5.03B

Free Cash Flow

-$583.34M

Financial Statements
Beta
Revenue$4.92B
Cost of Revenue$3.01B
Gross Profit$1.92B
R&D Expenses$383.23M
Operating Income$706.42M
Interest Expense$152.03M
Net Income$270.65M
EPS (Basic)$0.06
EPS (Diluted)$0.06
Shares Outstanding (Basic)4.38B
Shares Outstanding (Diluted)4.52B

Key Highlights

  • 1Global paid streaming memberships grew 22% year-over-year to 151.56 million as of June 30, 2019.
  • 2Consolidated revenues increased by 26% to $4.92 billion for the three months ended June 30, 2019.
  • 3International streaming revenues surged by 33% and accounted for 53% of total streaming revenue, highlighting its critical role in growth.
  • 4Net income decreased by 30% to $270.65 million, impacted by increased content investments and a higher effective tax rate.
  • 5Paid net membership additions declined significantly by 50% to 2.7 million globally, with domestic net adds being negative (-126).
  • 6Average monthly revenue per paying member increased by 3% globally, driven by price changes and a shift to higher-tier plans.
  • 7Free cash flow remained negative at $(593.8) million for the quarter, reflecting substantial upfront content payments.

Frequently Asked Questions

Netflix's revenue growth is primarily driven by an increase in the average number of paid streaming memberships globally, coupled with an increase in average monthly revenue per paying membership. This latter increase is attributed to price adjustments and a shift in subscriber mix towards higher-priced plans.

Net income decreased year-over-year primarily due to increased operating expenses, particularly content amortization and other costs associated with acquiring, licensing, and producing content, including more original programming. Additionally, higher effective tax rates in the current period compared to the prior year also impacted net income.

The 50% decrease in global paid net membership additions, especially the negative net additions in the domestic market, is a key area of focus. While the company emphasizes paid memberships as a more reliable growth indicator than total memberships (which includes free trials), this slowdown suggests potential market saturation or increased competition impacting subscriber acquisition rates.

Netflix has substantial streaming content obligations totaling $18.5 billion as of June 30, 2019, with a significant portion due within the next year. The company continues to invest heavily in content, particularly originals, which impacts free cash flow. While they anticipate current cash, available funds, and financing sources to be sufficient for at least the next twelve months, the ongoing large content commitments and negative free cash flow are crucial for investors to monitor.