10-QPeriod: Q2 FY2021

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2021

Filed July 22, 2021For Securities:NFLX

Summary

Netflix reported strong revenue growth in the second quarter of 2021, with total revenues increasing by 19% year-over-year to $7.34 billion. This growth was primarily driven by an 11% increase in average paying memberships and an 8% rise in average monthly revenue per paying membership, attributed to pricing adjustments and favorable foreign exchange rates. Despite robust top-line performance, the company experienced a significant slowdown in new subscriber additions, with paid net additions dropping 85% compared to the same period in 2020. This was largely due to the pandemic-induced surge in subscriber growth in Q2 2020, creating a high comparison base for Q2 2021. Operating income saw a substantial 36% increase, leading to an improved operating margin of 25.2%, up from 22.1% in the prior year. This margin expansion was aided by content amortization growing at a slower rate than revenue, a consequence of COVID-19 related content release delays. The company also maintained a strong liquidity position, with approximately $7.8 billion in cash, cash equivalents, and restricted cash as of June 30, 2021, though free cash flow turned negative in the quarter due to increased upfront content investments.

Financial Highlights

51 data points
Beta

Revenue

$7.34B

45.3% Gross Margin

Net Income

$1.35B

18.4% Net Margin

EPS (Diluted)

$0.30

Total Assets

$40.97B

Cash & Equivalents

$7.80B

Free Cash Flow

-$174.04M

Financial Statements
Beta
Revenue$7.34B
Cost of Revenue$4.02B
Gross Profit$3.32B
R&D Expenses$537.32M
Operating Income$1.85B
Interest Expense$191.32M
Net Income$1.35B
EPS (Basic)$0.30
EPS (Diluted)$0.30
Shares Outstanding (Basic)4.43B
Shares Outstanding (Diluted)4.55B

Key Highlights

  • 1Total revenues grew 19% to $7.34 billion in Q2 2021 compared to Q2 2020.
  • 2Paid net membership additions declined significantly by 85% year-over-year, from 10.1 million to 1.5 million.
  • 3Operating income increased 36% to $1.85 billion, with operating margin expanding to 25.2% from 22.1%.
  • 4Average monthly revenue per paying member increased by 8% to $11.67, driven by price changes and foreign exchange rates.
  • 5The company repurchased $500 million of its common stock in Q2 2021 under a $5 billion authorization.
  • 6Free cash flow turned negative at -$175 million in Q2 2021, a significant decrease from $899 million in Q2 2020, primarily due to increased upfront content payments.
  • 7Content obligations, including those not yet recognized on the balance sheet, stand at over $21.8 billion, indicating substantial future content spending.

Frequently Asked Questions

The decrease of 85% in paid net membership additions is attributed to the exceptionally strong performance in Q2 2020, which benefited from the COVID-19 pandemic's impact on entertainment consumption. The current period (Q2 2021) saw a return to more normalized growth patterns, making the year-over-year comparison appear steep.

The increase in operating income and margin is primarily due to revenue growth from higher average revenue per member and a slower increase in content amortization costs. Delays in content releases due to the pandemic meant that content costs (amortization) grew at a slower pace relative to the overall revenue increase, thereby expanding the operating margin.

Netflix is significantly increasing its investments in content, particularly original content, which requires substantial upfront cash payments for production. This has led to a substantial difference between content amortization expense and actual cash paid for content, resulting in a negative free cash flow of -$175 million in Q2 2021, compared to a positive $899 million in the prior year. The company has over $21.8 billion in content obligations for future periods.

Netflix reported approximately $7.8 billion in cash, cash equivalents, and restricted cash as of June 30, 2021. While total debt decreased slightly, the company has significant debt obligations, with approximately $1.4 billion due within the next twelve months. The company anticipates future capital needs from the debt market may be more limited and expects cash flows from operations, available funds, and its revolving credit facility to be sufficient for at least the next twelve months.