10-QPeriod: Q3 FY2020

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2020

Filed October 22, 2020For Securities:NFLX

Summary

Netflix Inc. (NFLX) reported its third-quarter 2020 results, showcasing continued global expansion despite a slowdown in net membership additions compared to the previous year. Total revenues increased by a robust 23% year-over-year, driven by a 25% rise in average paying memberships across its streaming services. This growth was partially offset by a 2% decrease in average revenue per paying member, largely attributable to unfavorable foreign currency exchange rates. The company also demonstrated improved operational efficiency, with an increase in operating margin from 18.7% to 20.4%, stemming from revenue growth outpacing cost increases in marketing, technology, and general administrative expenses. While Q3 saw a significant deceleration in paid net membership additions (down 67% year-over-year), Netflix attributes this to the pandemic's impact on early 2020 growth and anticipates slower growth for the remainder of the year. Despite this, the company's strong revenue growth and improved operating margin highlight its resilience and ability to expand its global subscriber base. Significant investments in content, a core strategy for growth, continue, leading to increased content amortization and a substantial increase in contractual content obligations, which remain a key focus for future cash flow management.

Financial Highlights

49 data points
Beta

Revenue

$6.44B

39.9% Gross Margin

Net Income

$789.98M

12.3% Net Margin

EPS (Diluted)

$0.17

Total Assets

$38.62B

Cash & Equivalents

$8.42B

Free Cash Flow

$1.15B

Financial Statements
Beta
Revenue$6.44B
Cost of Revenue$3.87B
Gross Profit$2.57B
R&D Expenses$453.80M
Operating Income$1.31B
Interest Expense$197.08M
Net Income$789.98M
EPS (Basic)$0.18
EPS (Diluted)$0.17
Shares Outstanding (Basic)4.42B
Shares Outstanding (Diluted)4.55B

Key Highlights

  • 1Total revenues grew 23% year-over-year to $6.436 billion in Q3 2020.
  • 2Global paid streaming memberships reached 195.15 million by the end of Q3 2020, a 23% increase year-over-year.
  • 3Paid net membership additions significantly declined by 67% in Q3 2020 compared to Q3 2019, with the company expecting continued slower growth for the remainder of 2020 due to the COVID-19 pandemic's uneven impact.
  • 4Operating margin improved to 20.4% from 18.7% in the prior year's quarter, driven by revenue growth outpacing cost escalations.
  • 5Average monthly revenue per paying membership decreased by 2% to $10.95 globally, influenced by foreign currency fluctuations.
  • 6Cost of revenues increased by 25% due to higher content amortization and production expenses.
  • 7Free cash flow was positive at $1.145 billion for the quarter, a substantial turnaround from a negative $551 million in the prior year, driven by increased revenues and delayed content payments due to COVID-19 production disruptions.

Frequently Asked Questions

Netflix's primary driver of revenue growth in Q3 2020 was the expansion of its global subscriber base. Average paying memberships increased by 25% year-over-year, contributing to a 23% increase in total revenues. This growth was seen across most regions, with significant revenue increases in EMEA and APAC.

The company attributes the 67% decrease in paid net membership additions in Q3 2020 compared to Q3 2019 primarily to the lingering effects of the COVID-19 pandemic. The pandemic led to an unusual surge in additions in the first half of 2020, resulting in a smaller base for year-over-year growth in the third quarter. Netflix anticipates slower growth for the rest of 2020 compared to the prior year.

Foreign currency fluctuations had a negative impact on Netflix's average revenue per paying member and overall reported revenues. A strengthening U.S. dollar relative to certain foreign currencies led to a 2% decrease in average monthly revenue per paying membership globally. For the nine months ended September 30, 2020, revenues would have been approximately $562 million higher if exchange rates had remained constant compared to 2019. Additionally, the company reported significant foreign exchange losses, largely due to the remeasurement of euro-denominated debt.

Netflix continues to significantly increase its investments in global content, particularly original content. This strategy requires substantial upfront cash payments for production and licensing, impacting liquidity and expected to result in continued negative free cash flow in the long term. However, for Q3 2020, free cash flow was positive due to increased revenues and delayed content payments resulting from pandemic-related production disruptions. The company has substantial content obligations, totaling over $19 billion, with a significant portion due within the next three years.