UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
OR
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35727
Netflix, Inc.
(Exact name of Registrant as specified in its charter)
|
| | | |
Delaware | 77-0467272 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| | | |
100 Winchester Circle, | Los Gatos, | California | 95032 |
(Address of principal executive offices) | (Zip Code) |
100 Winchester Circle, Los Gatos, California 95032
(Address and zip code of principal executive offices)
(408) 408) 540-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.001 per share | NFLX | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filerAccelerated Filer | x☒ | | Accelerated filer | o☐ |
Non-accelerated filer | o☐ | (Do not check if a smaller reporting company) | Smaller reporting company | o☐ |
| | | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of September 30, 2017,2020, there were 432,731,130441,795,008 shares of the registrant’s common stock, par value $0.001, outstanding.
Table of Contents
|
| | |
| | Page |
| Part I. Financial Information | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| Part II. Other Information | |
Item 1. | | |
Item 1A. | | |
Item 6. | | |
| | |
| | |
NETFLIX, INC.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Revenues | $ | 2,984,859 |
| | $ | 2,290,188 |
| | $ | 8,406,958 |
| | $ | 6,353,128 |
| $ | 6,435,637 |
| | $ | 5,244,905 |
| | $ | 18,351,614 |
| | $ | 14,689,013 |
|
Cost of revenues | 1,992,980 |
| | 1,532,844 |
| | 5,552,312 |
| | 4,375,482 |
| 3,867,751 |
| | 3,097,919 |
| | 11,111,159 |
| | 8,974,190 |
|
Marketing | 312,490 |
| | 282,043 |
| | 858,083 |
| | 706,082 |
| 527,597 |
| | 553,797 |
| | 1,465,797 |
| | 1,773,525 |
|
Technology and development | 255,236 |
| | 216,099 |
| | 779,427 |
| | 626,907 |
| 453,802 |
| | 379,776 |
| | 1,342,664 |
| | 1,135,773 |
|
General and administrative | 215,526 |
| | 153,166 |
| | 623,760 |
| | 418,798 |
| 271,624 |
| | 233,174 |
| | 800,947 |
| | 659,783 |
|
Operating income | 208,627 |
| | 106,036 |
| | 593,376 |
| | 225,859 |
| 1,314,863 |
| | 980,239 |
| | 3,631,047 |
| | 2,145,742 |
|
Other income (expense): | | | | | | | | | | | | | | |
Interest expense | (60,688 | ) | | (35,536 | ) | | (162,912 | ) | | (106,528 | ) | (197,079 | ) | | (160,660 | ) | | (570,313 | ) | | (448,222 | ) |
Interest and other income (expense) | (31,702 | ) | | 8,627 |
| | (76,473 | ) | | 50,907 |
| (256,324 | ) | | 192,744 |
| | (367,802 | ) | | 215,378 |
|
Income before income taxes | 116,237 |
| | 79,127 |
| | 353,991 |
| | 170,238 |
| 861,460 |
| | 1,012,323 |
| | 2,692,932 |
| | 1,912,898 |
|
Provision for (benefit from) income taxes | (13,353 | ) | | 27,610 |
| | (19,421 | ) | | 50,308 |
| |
Provision for income taxes | | 71,484 |
| | 347,079 |
| | 473,693 |
| | 632,952 |
|
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
| $ | 789,976 |
| | $ | 665,244 |
| | $ | 2,219,239 |
| | $ | 1,279,946 |
|
| | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | |
Basic | $ | 0.30 |
| | $ | 0.12 |
| | $ | 0.87 |
| | $ | 0.28 |
| $ | 1.79 |
| | $ | 1.52 |
| | $ | 5.04 |
| | $ | 2.93 |
|
Diluted | $ | 0.29 |
| | $ | 0.12 |
| | $ | 0.84 |
| | $ | 0.27 |
| $ | 1.74 |
| | $ | 1.47 |
| | $ | 4.89 |
| | $ | 2.83 |
|
Weighted-average common shares outstanding: | | | | | | | | | | | | | | |
Basic | 432,404 |
| | 428,937 |
| | 431,473 |
| | 428,514 |
| 441,526 |
| | 438,090 |
| | 440,486 |
| | 437,547 |
|
Diluted | 447,362 |
| | 438,389 |
| | 446,367 |
| | 438,180 |
| 455,088 |
| | 451,552 |
| | 453,846 |
| | 451,896 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
| $ | 789,976 |
| | $ | 665,244 |
| | $ | 2,219,239 |
| | $ | 1,279,946 |
|
Other comprehensive income (loss): | | | | | | | | | | | | | | |
Foreign currency translation adjustments | 5,678 |
| | 2,357 |
| | 22,604 |
| | 5,453 |
| 32,925 |
| | (20,894 | ) | | 22,374 |
| | (21,664 | ) |
Change in unrealized gains (losses) on available-for-sale securities, net of tax of $212, $(412), $378, and $810, respectively | 328 |
| | (676 | ) | | 599 |
| | 1,325 |
| |
Total other comprehensive income | 6,006 |
| | 1,681 |
| | 23,203 |
| | 6,778 |
| |
Comprehensive income | $ | 135,596 |
| | $ | 53,198 |
| | $ | 396,615 |
| | $ | 126,708 |
| $ | 822,901 |
| | $ | 644,350 |
| | $ | 2,241,613 |
| | $ | 1,258,282 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
|
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | |
Additions to streaming content assets | (2,315,017 | ) | | (2,442,080 | ) | | (7,328,104 | ) | | (6,550,445 | ) |
Change in streaming content liabilities | (34,587 | ) | | 529,885 |
| | 846,560 |
| | 1,674,125 |
|
Amortization of streaming content assets | 1,627,477 |
| | 1,224,108 |
| | 4,483,954 |
| | 3,457,990 |
|
Amortization of DVD content assets | 13,259 |
| | 19,284 |
| | 48,368 |
| | 59,746 |
|
Depreciation and amortization of property, equipment and intangibles | 19,238 |
| | 14,410 |
| | 52,838 |
| | 43,339 |
|
Stock-based compensation expense | 44,763 |
| | 43,495 |
| | 133,679 |
| | 130,029 |
|
Excess tax benefits from stock-based compensation | — |
| | (12,762 | ) | | — |
| | (37,401 | ) |
Other non-cash items | 9,896 |
| | 9,682 |
| | 43,081 |
| | 31,479 |
|
Foreign currency remeasurement loss on long-term debt | 50,830 |
| | — |
| | 115,050 |
| | — |
|
Deferred taxes | (57,090 | ) | | 14,338 |
| | (104,556 | ) | | (20,141 | ) |
Changes in operating assets and liabilities: | | | | | | | |
Other current assets | (41,399 | ) | | 10,250 |
| | (147,000 | ) | | 48,649 |
|
Accounts payable | 34,029 |
| | 27,810 |
| | 10,590 |
| | 16,707 |
|
Accrued expenses | 74,006 |
| | 28,957 |
| | 119,506 |
| | 72,288 |
|
Deferred revenue | 32,947 |
| | 30,230 |
| | 94,777 |
| | 80,485 |
|
Other non-current assets and liabilities | (7,549 | ) | | (11,065 | ) | | (40,146 | ) | | (43,604 | ) |
Net cash used in operating activities | (419,607 | ) | | (461,941 | ) | | (1,297,991 | ) | | (916,824 | ) |
Cash flows from investing activities: | | | | | | | |
Acquisitions of DVD content assets | (10,217 | ) | | (17,249 | ) | | (43,213 | ) | | (58,380 | ) |
Purchases of property and equipment | (33,963 | ) | | (27,366 | ) | | (151,717 | ) | | (46,605 | ) |
Change in other assets | (1,107 | ) | | 125 |
| | (2,940 | ) | | 676 |
|
Purchases of short-term investments | (2,799 | ) | | (128,136 | ) | | (74,819 | ) | | (181,590 | ) |
Proceeds from sale of short-term investments | 250,278 |
| | 171,747 |
| | 320,154 |
| | 198,687 |
|
Proceeds from maturities of short-term investments | — |
| | 24,855 |
| | 22,705 |
| | 112,555 |
|
Net cash provided by investing activities | 202,192 |
| | 23,976 |
| | 70,170 |
| | 25,343 |
|
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of debt | — |
| | — |
| | 1,420,510 |
| | — |
|
Issuance costs | (312 | ) | | — |
| | (15,325 | ) | | — |
|
Proceeds from issuance of common stock | 34,669 |
| | 3,819 |
| | 73,673 |
| | 11,587 |
|
Excess tax benefits from stock-based compensation | — |
| | 12,762 |
| | — |
| | 37,401 |
|
Other financing activities | 65 |
| | 58 |
| | 189 |
| | 170 |
|
Net cash provided by financing activities | 34,422 |
| | 16,639 |
| | 1,479,047 |
| | 49,158 |
|
Effect of exchange rate changes on cash and cash equivalents | 10,685 |
| | (441 | ) | | 27,667 |
| | 2,151 |
|
Net increase (decrease) in cash and cash equivalents | (172,308 | ) | | (421,767 | ) | | 278,893 |
| | (840,172 | ) |
Cash and cash equivalents, beginning of period | 1,918,777 |
| | 1,390,925 |
| | 1,467,576 |
| | 1,809,330 |
|
Cash and cash equivalents, end of period | $ | 1,746,469 |
| | $ | 969,158 |
| | $ | 1,746,469 |
| | $ | 969,158 |
|
Supplemental disclosure: | | | | | | | |
Change in investing activities included in liabilities | $ | (6,876 | ) | | $ | 17,243 |
| | $ | (27,041 | ) | | $ | 15,486 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 789,976 |
| | $ | 665,244 |
| | $ | 2,219,239 |
| | $ | 1,279,946 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Additions to content assets | (2,653,886 | ) | | (3,648,292 | ) | | (8,458,943 | ) | | (9,971,141 | ) |
Change in content liabilities | (379,458 | ) | | (95,548 | ) | | (228,945 | ) | | (122,660 | ) |
Amortization of content assets | 2,733,743 |
| | 2,279,977 |
| | 7,824,287 |
| | 6,636,578 |
|
Depreciation and amortization of property, equipment and intangibles | 28,589 |
| | 26,704 |
| | 83,767 |
| | 75,761 |
|
Stock-based compensation expense | 106,357 |
| | 100,262 |
| | 307,586 |
| | 305,310 |
|
Other non-cash items | 83,851 |
| | 57,934 |
| | 219,600 |
| | 164,337 |
|
Foreign currency remeasurement loss (gain) on debt | 249,194 |
| | (171,360 | ) | | 275,295 |
| | (167,676 | ) |
Deferred taxes | (40,277 | ) | | 52,105 |
| | 229,650 |
| | 94,251 |
|
Changes in operating assets and liabilities: | | | | | | | |
Other current assets | (22,974 | ) | | 145 |
| | (147,261 | ) | | (56,162 | ) |
Accounts payable | 111,677 |
| | (7,643 | ) | | (149,503 | ) | | (134,784 | ) |
Accrued expenses and other liabilities | 266,027 |
| | 260,872 |
| | 374,768 |
| | 391,814 |
|
Deferred revenue | 10,941 |
| | 22,729 |
| | 115,457 |
| | 154,607 |
|
Other non-current assets and liabilities | (19,999 | ) | | (44,923 | ) | | (100,248 | ) | | (75,528 | ) |
Net cash provided by (used in) operating activities | 1,263,761 |
| | (501,794 | ) | | 2,564,749 |
| | (1,425,347 | ) |
Cash flows from investing activities: | | | | | | | |
Purchases of property and equipment | (109,811 | ) | | (45,333 | ) | | (349,567 | ) | | (145,298 | ) |
Change in other assets | (8,840 | ) | | (4,021 | ) | | (9,388 | ) | | (34,195 | ) |
Net cash used in investing activities | (118,651 | ) | | (49,354 | ) | | (358,955 | ) | | (179,493 | ) |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of debt | 0 |
| | 0 |
| | 1,009,464 |
| | 2,243,196 |
|
Debt issuance costs | 0 |
| | 0 |
| | (7,559 | ) | | (18,192 | ) |
Proceeds from issuance of common stock | 68,665 |
| | 11,989 |
| | 201,419 |
| | 56,857 |
|
Net cash provided by financing activities | 68,665 |
| | 11,989 |
| | 1,203,324 |
| | 2,281,861 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 28,459 |
| | (29,325 | ) | | (30,624 | ) | | (29,341 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 1,242,234 |
| | (568,484 | ) | | 3,378,494 |
| | 647,680 |
|
Cash, cash equivalents and restricted cash at beginning of period | 7,180,046 |
| | 5,028,205 |
| | 5,043,786 |
| | 3,812,041 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 8,422,280 |
| | $ | 4,459,721 |
| | $ | 8,422,280 |
| | $ | 4,459,721 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Balance Sheets
(in thousands, except share and par value data)
| | | As of | As of |
| September 30, 2017 | | December 31, 2016 | September 30, 2020 | | December 31, 2019 |
| (unaudited) | | | (unaudited) | | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 1,746,469 |
| | $ | 1,467,576 |
| $ | 8,392,391 |
| | $ | 5,018,437 |
|
Short-term investments | — |
| | 266,206 |
| |
Current content assets, net | 4,223,387 |
| | 3,726,307 |
| |
Other current assets | 415,492 |
| | 260,202 |
| 1,434,089 |
| | 1,160,067 |
|
Total current assets | 6,385,348 |
| | 5,720,291 |
| 9,826,480 |
| | 6,178,504 |
|
Non-current content assets, net | 9,739,704 |
| | 7,274,501 |
| |
Content assets, net | | 25,067,633 |
| | 24,504,567 |
|
Property and equipment, net | 322,421 |
| | 250,395 |
| 828,118 |
| | 565,221 |
|
Other non-current assets | 504,067 |
| | 341,423 |
| 2,900,312 |
| | 2,727,420 |
|
Total assets | $ | 16,951,540 |
| | $ | 13,586,610 |
| $ | 38,622,543 |
| | $ | 33,975,712 |
|
Liabilities and Stockholders’ Equity | | | | | | |
Current liabilities: | | | | | | |
Current content liabilities | $ | 4,142,086 |
| | $ | 3,632,711 |
| $ | 4,599,654 |
| | $ | 4,413,561 |
|
Accounts payable | 301,443 |
| | 312,842 |
| 541,298 |
| | 674,347 |
|
Accrued expenses | 331,723 |
| | 197,632 |
| |
Accrued expenses and other liabilities | | 1,259,124 |
| | 843,043 |
|
Deferred revenue | 535,425 |
| | 443,472 |
| 1,040,202 |
| | 924,745 |
|
Short-term debt | | 499,517 |
| | 0 |
|
Total current liabilities | 5,310,677 |
| | 4,586,657 |
| 7,939,795 |
| | 6,855,696 |
|
Non-current content liabilities | 3,296,504 |
| | 2,894,654 |
| 2,926,574 |
| | 3,334,323 |
|
Long-term debt | 4,888,783 |
| | 3,364,311 |
| 15,547,616 |
| | 14,759,260 |
|
Other non-current liabilities | 128,215 |
| | 61,188 |
| 1,875,235 |
| | 1,444,276 |
|
Total liabilities | 13,624,179 |
| | 10,906,810 |
| 28,289,220 |
| | 26,393,555 |
|
Commitments and contingencies (Note 6) |
|
| |
|
| |
Commitments and contingencies (Note 7) | |
|
| |
|
|
Stockholders’ equity: | | | | | | |
Common stock, $0.001 par value; 4,990,000,000 shares authorized at September 30, 2017 and December 31, 2016; 432,731,130 and 430,054,212 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 1,807,123 |
| | 1,599,762 |
| |
Common stock, $0.001 par value; 4,990,000,000 shares authorized at September 30, 2020 and December 31, 2019; 441,795,008 and 438,806,649 issued and outstanding at September 30, 2020 and December 31, 2019, respectively | | 3,303,482 |
| | 2,793,929 |
|
Accumulated other comprehensive loss | (25,362 | ) | | (48,565 | ) | (1,147 | ) | | (23,521 | ) |
Retained earnings | 1,545,600 |
| | 1,128,603 |
| 7,030,988 |
| | 4,811,749 |
|
Total stockholders’ equity | 3,327,361 |
| | 2,679,800 |
| 10,333,323 |
| | 7,582,157 |
|
Total liabilities and stockholders’ equity | $ | 16,951,540 |
| | $ | 13,586,610 |
| $ | 38,622,543 |
| | $ | 33,975,712 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Total stockholders' equity, beginning balances | | $ | 9,334,753 |
| | $ | 6,105,548 |
| | $ | 7,582,157 |
| | $ | 5,238,765 |
|
| | | | | | | | |
Common stock and additional paid-in capital: | | | | | | | | |
Beginning balances | | $ | 3,127,813 |
| | $ | 2,566,365 |
| | $ | 2,793,929 |
| | $ | 2,315,988 |
|
Issuance of common stock upon exercise of options | | 69,312 |
| | 11,345 |
| | 201,967 |
| | 56,674 |
|
Stock-based compensation expense | | 106,357 |
| | 100,262 |
| | 307,586 |
| | 305,310 |
|
Ending balance | | $ | 3,303,482 |
| | $ | 2,677,972 |
| | $ | 3,303,482 |
| | $ | 2,677,972 |
|
| |
|
| |
|
| | | | |
Accumulated other comprehensive loss: | | | | | | | | |
Beginning balances | | $ | (34,072 | ) | | $ | (20,352 | ) | | $ | (23,521 | ) | | $ | (19,582 | ) |
Other comprehensive income (loss) | | 32,925 |
| | (20,894 | ) | | 22,374 |
| | (21,664 | ) |
Ending balance | | $ | (1,147 | ) | | $ | (41,246 | ) | | $ | (1,147 | ) | | $ | (41,246 | ) |
| | | | | | | | |
Retained earnings: | | | | | | | | |
Beginning balances | | $ | 6,241,012 |
| | $ | 3,559,535 |
| | $ | 4,811,749 |
| | $ | 2,942,359 |
|
Net income | | 789,976 |
| | 665,244 |
| | 2,219,239 |
| | 1,279,946 |
|
Adoption of ASU 2016-02, Leases (Topic 842) | | — |
| | — |
| | — |
| | 2,474 |
|
Ending balances | | $ | 7,030,988 |
| | $ | 4,224,779 |
| | $ | 7,030,988 |
| | $ | 4,224,779 |
|
| | | | | | | | |
Total stockholders' equity, ending balances | | $ | 10,333,323 |
| | $ | 6,861,505 |
| | $ | 10,333,323 |
| | $ | 6,861,505 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim consolidated financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the Securities and Exchange Commission (the “SEC”) on January 27, 2017.29, 2020. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the streaming content asset amortization policy;policy and the recognition and measurement of income tax assets and liabilities; and the valuation of stock-based compensation.liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.
The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. Interim results are not necessarily indicative of the results for a full year.
The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD, all of which derive revenue from monthly membership fees. See Note 10 for further detail on the Company's segments.
There have been no material changes in the Company’s significant accounting policies other than the adoption of Accounting Standards Update ("ASU") 2016-09 described below and in Note 9 and ASU 2017-01 described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Recently adopted accounting pronouncements
In MarchJune 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards CodificationUpdate ("ASC"ASU") Topic 718, Compensation2016-13, Financial Instruments - Stock Compensation.Credit Losses (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-092016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the Company present excess tax benefits on the Statementincurred loss impairment methodology in prior GAAP with a methodology that requires consideration of Cash Flows as an operating activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016.a broader range of information to estimate credit losses. The Company adopted ASU 2016-092016-13 in the first quarter of 2017 and elected to apply this adoption prospectively. Prior periods have not been adjusted. See Note 9 for information regarding the impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805):Clarifying the Definition of a Business. The standard provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. ASU 2017-01 is effective for fiscal periods beginning after December 15, 2017 (including interim periods within those periods) with early adoption permitted. The Company early adopted the standard in the third quarter of 2017 on a prospective basis2020 and the impact on itsof the adoption was not material to the Company's consolidated financial statements wasas credit losses are not material.
Recently issued accounting pronouncements not yet adopted
In May 2014,expected to be significant based on historical collection trends, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transferfinancial condition of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date for annual reporting periods beginning after December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective).payment partners, and external market factors. The Company will adopt ASU 2014-09 incontinue to actively monitor the first quarterimpact of 2018 using the modified retrospective approach. Because thecoronavirus (COVID-19) pandemic on expected credit losses.
2. Revenue Recognition
The Company's primary source of revenues is from monthly membership fees whichfees. Members are billed in advance of the start of their monthly membership and revenues are recognized ratably over each monthly membership period,period. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities. The Company is the principal in all its relationships where partners, including consumer electronics (“CE”) manufacturers, multichannel video programming distributors (“MVPDs”), mobile operators and internet service providers (“ISPs”), provide access to the service as the Company doesretains control over service delivery to its members. Typically, payments made to the partners, such as for marketing, are expensed, but in the case where the price that the member pays is established by the partners and there is no standalone price for the Netflix service (for instance, in a bundle), these payments are recognized as a reduction of revenues.
The following tables summarize streaming revenue, paid net membership additions, and paid memberships at end of period by region for the three and nine months ended September 30, 2020 and September 30, 2019, respectively:
United States and Canada (UCAN)
|
| | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | As of/ Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands) |
Revenues | | $ | 2,933,445 |
| | $ | 2,621,250 |
| | $ | 8,475,891 |
| | $ | 7,379,300 |
|
Paid net membership additions | | 177 |
| | 613 |
| | 5,419 |
| | 2,357 |
|
Paid memberships at end of period (1) | | 73,081 |
| | 67,114 |
| | 73,081 |
| | 67,114 |
|
Europe, Middle East, and Africa (EMEA)
|
| | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | As of/ Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands) |
Revenues | | $ | 2,019,083 |
| | $ | 1,428,040 |
| | $ | 5,635,094 |
| | $ | 3,980,506 |
|
Paid net membership additions | | 759 |
| | 3,126 |
| | 10,464 |
| | 9,537 |
|
Paid memberships at end of period (1) | | 62,242 |
| | 47,355 |
| | 62,242 |
| | 47,355 |
|
Latin America (LATAM)
|
| | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | As of/ Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands) |
Revenues | | $ | 789,384 |
| | $ | 741,434 |
| | $ | 2,368,205 |
| | $ | 2,049,042 |
|
Paid net membership additions | | 256 |
| | 1,490 |
| | 4,907 |
| | 3,303 |
|
Paid memberships at end of period (1) | | 36,324 |
| | 29,380 |
| | 36,324 |
| | 29,380 |
|
Asia-Pacific (APAC)
|
| | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | As of/ Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands) |
Revenues | | $ | 634,891 |
| | $ | 382,304 |
| | $ | 1,687,691 |
| | $ | 1,051,400 |
|
Paid net membership additions | | 1,012 |
| | 1,543 |
| | 7,271 |
| | 3,878 |
|
Paid memberships at end of period (1) | | 23,504 |
| | 14,485 |
| | 23,504 |
| | 14,485 |
|
|
|
(1) A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receive Netflix service following sign-up and a method of payment being provided, and that is not part of a free trial or other promotional offering by the Company to certain new and rejoining members. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations generally become effective at the end of the prepaid membership period. Involuntary cancellations, as a result of a failed method of payment, becomes effective immediately. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company’s internal systems, which utilize industry standard geo-location technology. |
Total U.S. revenues, inclusive of DVD revenues not expectreported in the impact on its consolidated financial statementstables above, were $2.8 billion and $8.0 billion, respectively, for the three and nine months ended September 30, 2020, and $2.5 billion and $7.0 billion, respectively, for the three and nine months ended September 30, 2019. DVD revenues were $59 million and $185 million, respectively, for the three and nine months ended September 30, 2020, and $72 million and $229 million, respectively, for the three and nine months ended September 30, 2019.
Deferred revenue consists of membership fees billed that have not been recognized, as well as gift cards and other prepaid memberships that have not been fully redeemed. As of September 30, 2020, total deferred revenue was $1,040 million, the vast majority of which was related to membership fees billed that are expected to be material.
In February 2016,recognized as revenue within the FASB issued ASU 2016-02, Leases (Topic 842) next month. The remaining deferred revenue balance, which is related to gift cards and other prepaid memberships, will be recognized as revenue over the period of service after redemption, which is expected to occur over the next 12 months. The $115 million increase in orderdeferred revenue as compared to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheetof $925 million for those leases classified as operating leases under previousthe year ended December 31, 2019 is a result of the increase in membership fees billed due to increased memberships.
GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company's balance sheet for real estate operating leases.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method to each period presented and early adoption is permitted. The Company will adopt ASU 2016-18 in the first quarter of 2018 and does not expect the impact on its consolidated financial statements to be material.
2.3. Earnings Per Share
Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (in thousands, except per share data) |
Basic earnings per share: | | | | | | | |
Net income | $ | 789,976 |
| | $ | 665,244 |
| | $ | 2,219,239 |
| | $ | 1,279,946 |
|
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 441,526 |
| | 438,090 |
| | 440,486 |
| | 437,547 |
|
Basic earnings per share | $ | 1.79 |
| | $ | 1.52 |
| | $ | 5.04 |
| | $ | 2.93 |
|
| | | | | | | |
Diluted earnings per share: | | | | | | | |
Net income | $ | 789,976 |
| | $ | 665,244 |
| | $ | 2,219,239 |
| | $ | 1,279,946 |
|
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 441,526 |
| | 438,090 |
| | 440,486 |
| | 437,547 |
|
Employee stock options | 13,562 |
| | 13,462 |
| | 13,360 |
| | 14,349 |
|
Weighted-average number of shares | 455,088 |
| | 451,552 |
| | 453,846 |
| | 451,896 |
|
Diluted earnings per share | $ | 1.74 |
| | $ | 1.47 |
| | $ | 4.89 |
| | $ | 2.83 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| (in thousands, except per share data) |
Basic earnings per share: | | | | | | | |
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
|
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 432,404 |
| | 428,937 |
| | 431,473 |
| | 428,514 |
|
Basic earnings per share | $ | 0.30 |
| | $ | 0.12 |
| | $ | 0.87 |
| | $ | 0.28 |
|
| | | | | | | |
Diluted earnings per share: | | | | | | | |
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
|
Shares used in computation: | | | | | | | |
Weighted-average common shares outstanding | 432,404 |
| | 428,937 |
| | 431,473 |
| | 428,514 |
|
Employee stock options | 14,958 |
| | 9,452 |
| | 14,894 |
| | 9,666 |
|
Weighted-average number of shares | 447,362 |
| | 438,389 |
| | 446,367 |
| | 438,180 |
|
Diluted earnings per share | $ | 0.29 |
| | $ | 0.12 |
| | $ | 0.84 |
| | $ | 0.27 |
|
Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Employee stock options | 124 |
| | 2,402 |
| | 560 |
| | 1,268 |
|
|
| | | | | | | | | | | |
| Three Months Ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| (in thousands) |
Employee stock options | 187 |
| | 2,559 |
| | 213 |
| | 1,942 |
|
4. Cash, Cash Equivalents and Restricted Cash
3. Short-term Investments
In July 2017,The following tables summarize the Company sold all short-term investments. AsCompany's cash, cash equivalents, and restricted cash as of September 30, 2017, $13.9 million2020 and $1.3 million of money market funds, classified as Level 1 securities, were included in Cash and cash equivalents and Non-current assets, respectively, on the Company's Consolidated Balance Sheet. Additionally, $3.6 million of restricted cash is included in Non-current assets on the Company's Consolidated Balance Sheet.
The following table summarizes, by major security type, the Company’s assets at December 31, 2016 that were measured at fair value, the category using the fair value hierarchy and where they are classified on the Consolidated Balance Sheets:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Cash and cash equivalents | | Short-term investments | | Non-current assets (1) |
| (in thousands) |
Cash | $ | 1,267,523 |
| | $ | — |
| | $ | — |
| | $ | 1,267,523 |
| | $ | 1,264,126 |
| | $ | — |
| | $ | 3,397 |
|
Level 1 securities: | | | | | | | | | | | | | |
Money market funds | 204,967 |
| | — |
| | — |
| | 204,967 |
| | 203,450 |
| | — |
| | 1,517 |
|
Level 2 securities: | | | | | | | | | | | | | |
Corporate debt securities | 199,843 |
| | 110 |
| | (731 | ) | | 199,222 |
| | — |
| | 199,222 |
| | — |
|
Government securities | 35,944 |
| | — |
| | (128 | ) | | 35,816 |
| | — |
| | 35,816 |
| | — |
|
Certificates of deposit | 9,833 |
| | — |
| | — |
| | 9,833 |
| | — |
| | 9,833 |
| | — |
|
Agency securities | 21,563 |
| | — |
| | (228 | ) | | 21,335 |
| | — |
| | 21,335 |
| | — |
|
Total | $ | 1,739,673 |
| | $ | 110 |
| | $ | (1,087 | ) | | $ | 1,738,696 |
| | $ | 1,467,576 |
| | $ | 266,206 |
| | $ | 4,914 |
|
|
| | | | | | | | | | | | | | | |
| As of September 30, 2020 |
| Cash and cash equivalents | | Other Current Assets | | Non-current Assets | | Total |
| (in thousands) |
Cash | $ | 2,968,826 |
| | $ | 2,761 |
| | $ | 26,875 |
| | $ | 2,998,462 |
|
Level 1 securities: | | | | | | | |
Money market funds | 5,123,565 |
| | 0 |
| | 253 |
| | 5,123,818 |
|
Level 2 securities: | | | | | | | |
Foreign Time Deposits | 300,000 |
| | 0 |
| | 0 |
| | 300,000 |
|
| | | | | | | |
| $ | 8,392,391 |
| | $ | 2,761 |
| | $ | 27,128 |
| | $ | 8,422,280 |
|
(1) Primarily |
| | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| Cash and cash equivalents | | Other Current Assets | | Non-current Assets | | Total |
| (in thousands) |
Cash | $ | 3,103,525 |
| | $ | 1,863 |
| | $ | 22,161 |
| | $ | 3,127,549 |
|
Level 1 securities: | | | | | | | |
Money market funds | 1,614,912 |
| | 0 |
| | 1,325 |
| | 1,616,237 |
|
Level 2 securities: | | | | | | | |
Foreign Time Deposits | 300,000 |
| | 0 |
| | 0 |
| | 300,000 |
|
| | | | | | | |
| $ | 5,018,437 |
| | $ | 1,863 |
| | $ | 23,486 |
| | $ | 5,043,786 |
|
Other current assets include restricted cash that isfor self insurance. Non-current assets include restricted cash related to workers compensation deposits and letter of credit agreements.
Fair value is a market-based measurement that is determined based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy level assigned to each security in the Company’s available-for-sale portfolio and cash equivalents is based on its assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The fair value of available-for-sale securities and cash equivalents included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. The fair value of available-for-sale securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from an independent pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. The Company's procedures include controls to ensure that appropriate fair values are recorded, such as comparing prices obtained from multiple independent sources.
See Note 56 to the consolidated financial statements for further information regarding the fair value of the Company’s senior notes.
There were no material gross realized gains or losses in the three and nine months ended September 30, 20172020 and 2016,2019, respectively.
4.
5. Balance Sheet Components
Content Assets, Net
Content assets consisted of the following:
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Licensed content, net | $ | 14,297,143 |
| | $ | 14,703,352 |
|
| | | |
Produced content, net |
|
| |
|
|
Released, less amortization | 5,186,247 |
| | 4,382,685 |
|
In production | 4,696,990 |
| | 4,750,664 |
|
In development and pre-production | 887,253 |
| | 667,866 |
|
| 10,770,490 |
| | 9,801,215 |
|
| | | |
Total | $ | 25,067,633 |
| | $ | 24,504,567 |
|
| | | |
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Licensed content, net | $ | 11,462,217 |
| | $ | 9,595,315 |
|
| | | |
Produced content, net |
|
| |
|
|
Released, less amortization | 984,945 |
| | 335,400 |
|
In production | 1,338,208 |
| | 1,010,463 |
|
In development and pre-production | 163,393 |
| | 34,215 |
|
| 2,486,546 |
| | 1,380,078 |
|
DVD, net | 14,328 |
| | 25,415 |
|
Total | $ | 13,963,091 |
| | $ | 11,000,808 |
|
| | | |
Current content assets, net | $ | 4,223,387 |
| | $ | 3,726,307 |
|
Non-current content assets, net | $ | 9,739,704 |
| | $ | 7,274,501 |
|
ProducedAs of September 30, 2020, approximately $5,743 million, $3,675 million, and $2,264 million of the $14,297 million unamortized cost of the licensed content is includedexpected to be amortized in "Non-current content assets, net" oneach of the Consolidated Balance Sheets. Certain original content is licensednext three years. As of September 30, 2020, approximately $1,894 million, $1,465 million, and therefore not included in produced content. Of$1,025 million of the $5,186 million unamortized cost of the produced content that has been released approximately 29%, 79% and over 80% of the unamortized cost is expected to be amortized overin each of the next twelve, thirty-six and forty-eight months, respectively. Thethree years.
As of September 30, 2020, the amount of accrued participations and residuals iswas not material.
The following table represents the amortization of content assets:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Licensed content | $ | 1,885,259 |
| | $ | 1,810,757 |
|
Produced content | 848,484 |
| | 469,220 |
|
Total | $ | 2,733,743 |
| | $ | 2,279,977 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Licensed content | $ | 5,628,499 |
| | $ | 5,382,225 |
|
Produced content | 2,195,788 |
| | 1,254,353 |
|
Total | $ | 7,824,287 |
| | $ | 6,636,578 |
|
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
|
| | | | | | | | | | |
| | As of | | |
| | September 30, 2020 | | December 31, 2019 | | Estimated Useful Lives |
| | (in thousands) | | |
Land | | $ | 13,560 |
| | $ | 6,125 |
| | |
Buildings | | 41,894 |
| | 33,141 |
| | 30 years |
Leasehold improvements | | 387,172 |
| | 354,999 |
| | Over life of lease |
Furniture and fixtures | | 95,240 |
| | 87,465 |
| | 3-15 years |
Information technology | | 264,358 |
| | 243,565 |
| | 3 years |
Corporate aircraft | | 110,621 |
| | 108,995 |
| | 8 years |
Machinery and equipment | | 44,111 |
| | 46,415 |
| | 3-5 years |
Capital work-in-progress | | 345,347 |
| | 100,521 |
| | |
Property and equipment, gross | | 1,302,303 |
| | 981,226 |
| | |
Less: Accumulated depreciation | | (474,185 | ) | | (416,005 | ) | | |
Property and equipment, net | | $ | 828,118 |
| | $ | 565,221 |
| | |
Leases
The Company has entered into operating leases primarily for real estate. These operating leases are included in "Other non-current assets" on the Company's Consolidated Balance Sheets, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Company's Consolidated Balance Sheets. As of September 30, 2020, total right-of-use assets were approximately $1,939 million and total operating lease liabilities were approximately $2,090 million, of which $237 million and $1,853 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. As of December 31, 2019, total right-of-use assets were approximately $1,532 million and total operating lease liabilities were approximately $1,613 million, of which $190 million and $1,423 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less. These leases are not recorded on the Company's Consolidated Balance Sheets. All operating lease expense is recognized on a straight-line basis over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's right-of-use assets and related lease liabilities were as follows:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Cash paid for operating lease liabilities | $ | 70,917 |
| | $ | 51,767 |
|
Right-of-use assets obtained in exchange for new operating lease obligations | 175,901 |
| | 77,549 |
|
|
| | | | | | | | | | |
| | As of | | |
| | September 30, 2017 | | December 31, 2016 | | Estimated Useful Lives
|
| | (in thousands) | | |
Information technology assets | | $ | 225,988 |
| | $ | 185,345 |
| | 3 years |
Furniture and fixtures | | 47,312 |
| | 32,185 |
| | 3 years |
Buildings | | 40,681 |
| | 40,681 |
| | 30 years |
Leasehold improvements | | 218,242 |
| | 107,945 |
| | Over life of lease |
DVD operations equipment | | 68,196 |
| | 70,152 |
| | 5 years |
Corporate aircraft | | 29,391 |
| | — |
| | 8 years |
Capital work-in-progress | | 14,412 |
| | 108,296 |
| |
|
Property and equipment, gross | | 644,222 |
| | 544,604 |
| | |
Less: Accumulated depreciation | | (321,801 | ) | | (294,209 | ) | | |
Property and equipment, net | | $ | 322,421 |
| | $ | 250,395 |
| | |
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Cash paid for operating lease liabilities | $ | 187,880 |
| | $ | 130,740 |
|
Right-of-use assets obtained in exchange for new operating lease obligations (1) | 592,331 |
| | 1,150,443 |
|
(1) In the nine months ended September 30, 2019, the balance includes $743 million for operating leases existing on January 1, 2019. The $592 million in additions in the nine months ended September 30, 2020 primarily relate to the additions of corporate office space.
The decrease in capital work-in-progress from December 31, 2016 is primarily due to leasehold improvements forOther Current Assets
Other current assets consisted of the Company's expanded Los Gatos, California headquarters and the Company's new Los Angeles, California facility, both of which were placed into operation in the first quarter of 2017.following:
|
| | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
Trade receivables | | $ | 604,789 |
| | $ | 454,399 |
|
Prepaid expenses | | 209,218 |
| | 180,999 |
|
Other | | 620,082 |
| | 524,669 |
|
Total other current assets | | $ | 1,434,089 |
| | $ | 1,160,067 |
|
5. Long-term
6. Debt
As of September 30, 2017,2020, the Company had aggregate outstanding long-term debtnotes of $4,888.8$16,047 million, net of $46.8$111 million of issuance costs, with varying maturities (the "Notes"). Of the outstanding balance, $500 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of December 31, 2019, the Company had aggregate outstanding long-term notes of $14,759 million, net of $114 million of issuance costs. Each of the Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at fixed rates. A portion of the outstanding notes is denominated in foreign currency (comprised of €5,170 million) and is remeasured into U.S. dollars at each balance sheet date (with remeasurement loss totaling $249 million and $275 million, respectively, for the three and nine months ended September 30, 2020).
The following table provides a summary of the Company's Notesoutstanding debt and the fair values based on quoted market prices in less active markets as of September 30, 20172020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | |
| | Principal Amount at Par | | | | | Level 2 Fair Value as of |
| | September 30, 2020 | | December 31, 2019 | Issuance Date | | Maturity | | September 30, 2020 | | December 31, 2019 |
| | (in millions) | | | | | (in millions) |
5.375% Senior Notes | | $ | 500 |
| | $ | 500 |
| February 2013 | | February 2021 | | $ | 507 |
| | $ | 518 |
|
5.500% Senior Notes | | 700 |
| | 700 |
| February 2015 | | February 2022 | | 736 |
| | 744 |
|
5.750% Senior Notes | | 400 |
| | 400 |
| February 2014 | | March 2024 | | 445 |
| | 444 |
|
5.875% Senior Notes | | 800 |
| | 800 |
| February 2015 | | February 2025 | | 906 |
| | 896 |
|
3.000% Senior Notes (1) | | 551 |
| | 0 |
| April 2020 | | June 2025 | | 575 |
| | 0 |
|
3.625% Senior Notes | | 500 |
| | 0 |
| April 2020 | | June 2025 | | 523 |
| | 0 |
|
4.375% Senior Notes | | 1,000 |
| | 1,000 |
| October 2016 | | November 2026 | | 1,092 |
| | 1,026 |
|
3.625% Senior Notes (1) | | 1,523 |
| | 1,459 |
| May 2017 | | May 2027 | | 1,651 |
| | 1,565 |
|
4.875% Senior Notes | | 1,600 |
| | 1,600 |
| October 2017 | | April 2028 | | 1,800 |
| | 1,670 |
|
5.875% Senior Notes | | 1,900 |
| | 1,900 |
| April 2018 | | November 2028 | | 2,269 |
| | 2,111 |
|
4.625% Senior Notes (1) | | 1,289 |
| | 1,234 |
| October 2018 | | May 2029 | | 1,495 |
| | 1,378 |
|
6.375% Senior Notes | | 800 |
| | 800 |
| October 2018 | | May 2029 | | 989 |
| | 916 |
|
3.875% Senior Notes (1) | | 1,406 |
| | 1,346 |
| April 2019 | | November 2029 | | 1,556 |
| | 1,429 |
|
5.375% Senior Notes | | 900 |
| | 900 |
| April 2019 | | November 2029 | | 1,062 |
| | 960 |
|
3.625% Senior Notes (1) | | 1,289 |
| | 1,234 |
| October 2019 | | June 2030 | | 1,402 |
| | 1,273 |
|
4.875% Senior Notes | | 1,000 |
| | 1,000 |
| October 2019 | | June 2030 | | 1,142 |
| | 1,019 |
|
| | $ | 16,158 |
| | $ | 14,873 |
| | | | | $ | 18,150 |
| | $ | 15,949 |
|
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Level 2 Fair Value as of |
| Principal Amount at Par | | Issuance Date | | Maturity | | Interest Payment Dates | | September 30, 2017 | | December 31, 2016 |
| (in millions) | | | | | | | | (in millions) |
3.625% Senior Notes (1) | $ | 1,535.6 |
| | May 2017 | | 2027 | | May 15 and November 15 | | $ | 1,563 |
| | $ | — |
|
4.375% Senior Notes | 1,000.0 |
| | October 2016 | | 2026 | | May 15 and November 15 | | 1,006 |
| | 975 |
|
5.50% Senior Notes | 700.0 |
| | February 2015 | | 2022 | | April 15 and October 15 | | 765 |
| | 758 |
|
5.875% Senior Notes | 800.0 |
| | February 2015 | | 2025 | | April 15 and October 15 | | 879 |
| | 868 |
|
5.750% Senior Notes | 400.0 |
| | February 2014 | | 2024 | | March 1 and September 1 | | 436 |
| | 431 |
|
5.375% Senior Notes | 500.0 |
| | February 2013 | | 2021 | | February 1 and August 1 | | 539 |
| | 539 |
|
| $ | 4,935.6 |
| | | | | | | | | | |
(1) Debt isThe following Senior Notes have a principal amount denominated in euro with aeuro: 3.000% Senior Notes for €470 million, 3.625% Senior Notes for €1,300 million, aggregate principal amount and is remeasured into U.S. dollars at each balance sheet date. Total proceeds were $1,420.54.625% Senior Notes for €1,100 million, 3.875% Senior Notes for €1,200 million, and remeasurement loss on long-term debt was $50.8 million3.625% Senior Notes for €1,100 million.
The expected timing of principal and $115.1 millioninterest payments for the three and nine months ending September 30, 2017, respectively.these Notes are as follows:
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Less than one year | $ | 1,258,639 |
| | $ | 736,969 |
|
Due after one year and through three years | 2,136,439 |
| | 2,581,471 |
|
Due after three years and through five years | 3,612,818 |
| | 1,705,201 |
|
Due after five years | 14,875,099 |
| | 15,699,800 |
|
Total debt obligations | $ | 21,882,995 |
| | $ | 20,723,441 |
|
Each of the Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. The Company may redeem the Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest and an applicable premium. The Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of certain of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. As of September 30, 20172020 and December 31, 2016,2019, the Company was in compliance with all related covenants.
Revolving Credit Facility
In July 2017,As of September 30, 2020, the Company entered intohas a $500.0$750 million unsecured revolving credit facility (“("Revolving Credit Agreement”Agreement"), with an uncommitted incremental facility to increase the amount of the revolving credit facility by up to an additional $250.0 million, subject to certain terms and conditions. which matures on March 29, 2024. Revolving loans may be borrowed, repaid and reborrowed until July 27, 2022,March 29, 2024, at which time all amounts borrowed must be repaid. The Company may use the proceeds of future borrowings under the Revolving Credit Agreement for working capital and general corporate purposes. As of September 30, 2017,2020, no amounts have been borrowed under the Revolving Credit Agreement.
The borrowings under the Revolving Credit Agreement bear interest, at the Company’s option, of either (i) a floating rate equal to a base rate (the “Alternate Base Rate”) or (ii) a rate equal to an adjusted London interbank offered rate (the “Adjusted LIBO Rate”), plus a margin of 0.75%. The Alternate Base Rate is defined as the greatest of (A) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate, (B) the federal funds rate, plus 0.500% and (C) the Adjusted LIBO Rate for a one-month interest period, plus 1.00%. The Adjusted LIBO Rate is defined as the London interbank offered rate for deposits in U.S. dollars, for the relevant interest period, adjusted for statutory reserve requirements, but in no event shall the Adjusted LIBO Rate be less than 0.00% per annum.
Regulatory authorities that oversee financial markets have announced that after the end of 2021, they would no longer compel banks currently reporting information used to set the LIBO Rate to continue to make rate submissions. As a result, it is possible that beginning in 2022, the LIBO Rate will no longer be available as a reference rate. Under the terms of the Company's Revolving Credit Agreement, in the event of the discontinuance of the LIBO Rate, a mutually agreed-upon alternate benchmark rate will be established to replace the LIBO Rate. The Company and Lenders shall in good faith establish an alternate benchmark rate which places the Lenders and the Company in the same economic position that existed immediately prior to the discontinuation of the LIBO Rate. The Company does not anticipate that the discontinuance of the LIBO Rate will materially impact its liquidity or financial position.
The Company is also obligated to pay a commitment fee on the undrawn amounts of the Revolving Credit Agreement at aan annual rate of 0.10%. The Revolving Credit Agreement requires the Company to comply with certain covenants, including covenants that limit or restrict the ability of the Company’s subsidiaries to incur debt and limit or restrict the ability of the Company and its subsidiaries to grant liens and enter into sale and leaseback transactions; and, in the case of the Company or a guarantor, merge, consolidate, liquidate, dissolve or sell, transfer, lease or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole. As of September 30, 2017,2020 and December 31, 2019, the Company was in compliance with all related covenants.
6.
7. Commitments and Contingencies
Streaming Content
As of September 30, 2017,2020, the Company had $17.0$19.1 billion of obligations comprised of $4.1$4.6 billion included in "Current content liabilities" and $3.3$2.9 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $9.6$11.6 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.
As of December 31, 2016,2019, the Company had $14.5$19.5 billion of obligations comprised of $3.6$4.4 billion included in "Current content liabilities" and $2.9$3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $8.0$11.8 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.
The expected timing of payments for these streaming content obligations is as follows:
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Less than one year | $ | 8,668,296 |
| | $ | 8,477,367 |
|
Due after one year and through three years | 8,004,624 |
| | 8,352,731 |
|
Due after three years and through five years | 1,956,565 |
| | 2,041,340 |
|
Due after five years | 442,769 |
| | 618,644 |
|
Total content obligations | $ | 19,072,254 |
| | $ | 19,490,082 |
|
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Less than one year | $ | 6,984,360 |
| | $ | 6,200,611 |
|
Due after one year and through three years | 7,918,009 |
| | 6,731,336 |
|
Due after three years and through five years | 1,918,123 |
| | 1,386,934 |
|
Due after five years | 171,438 |
| | 160,606 |
|
Total streaming content obligations | $ | 16,991,930 |
| | $ | 14,479,487 |
|
Content obligations include amounts related to the acquisition, licensing and production of streaming content. Obligations that are in non-U.S. dollar currencies are translated to the U.S. dollar at period end rates. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements.agreements as well as other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time the Company enters into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of such license agreements. The Company does not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant.
Legal Proceedings
From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations.
The Company is involved in litigation matters not listed herein but does not consider the matters to be material either individually or in the aggregate at this time. The Company's view of the matters not listed may change in the future as the litigation and events related thereto unfold.
Indemnification
In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.
The Company's obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.
It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. NoNaN amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.
7.
8. Stockholders’ Equity
Stock Option Plan
In
On June 2011,4, 2020, the CompanyCompany's stockholders approved the 2020 Stock Plan, which was adopted by the Company’s Board of Directors on March 4, 2020 subject to stockholder approval. The 2020 Stock Plan is the successor to the 2011 Stock Plan. The 20112020 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. The 2020 Stock plan authorized 17,500,000 new shares to be available for award grants. As of September 30, 2017, 11.3 millionthe date the 2020 Stock Plan was adopted by the Company's Board of Directors, 5,530,106 shares were reservedavailable to be granted under the 2011 Stock Plan. These shares are available for futureaward grants under the 20112020 Stock Plan.
A summary of the activities related to the Company’s stock option plans is as follows:
|
| | | | | | | | | |
| | | Options Outstanding |
| Shares Available for Grant | | Number of Shares | | Weighted- Average Exercise Price (per share) |
Balances as of December 31, 2019 | 6,111,561 |
| | 20,859,326 |
| | $ | 124.28 |
|
New Shares Authorized | 17,500,000 |
| | — |
| | — |
|
Granted | (1,498,232 | ) | | 1,498,232 |
| | 412.45 |
|
Exercised | — |
| | (2,988,359 | ) | | 67.58 |
|
Expired | — |
| | (188 | ) | | 13.38 |
|
Balances as of September 30, 2020 | 22,113,329 |
| | 19,369,011 |
| | $ | 155.32 |
|
Vested and exercisable as of September 30, 2020 | | | 19,369,011 |
| | $ | 155.32 |
|
|
| | | | | | | | | | | | | | | |
| | | Options Outstanding | | | | |
| Shares Available for Grant | | Number of Shares | | Weighted- Average Exercise Price (per share) | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Balances as of December 31, 2016 | 13,289,953 |
| | 22,437,347 |
| | $ | 44.83 |
| | | | |
Granted | (1,988,266 | ) | | 1,988,266 |
| | 151.82 |
| | | | |
Exercised | — |
| | (2,676,918 | ) | | 27.53 |
| | | | |
Expired | — |
| | (1,561 | ) | | 3.25 |
| | | | |
Balances as of September 30, 2017 | 11,301,687 |
| | 21,747,134 |
| | $ | 56.74 |
| | 6.04 | | $ | 2,709,943 |
|
Vested and exercisable as of September 30, 2017 | | | 21,747,134 |
| | $ | 56.74 |
| | 6.04 | | $ | 2,709,943 |
|
The aggregate intrinsic value inof the table aboveCompany's outstanding stock options as of September 30, 2020 was $6,684 million and represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 20172020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the third quarter of 2017.2020. This amount changes based on the fair market value of the Company’s common stock. The weighted-average remaining contractual term of the Company's outstanding stock options as of September 30, 2020 included in the table above was 5.47 years.
A summary of the amounts related to option exercises, is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Total intrinsic value of options exercised | $ | 321,859 |
| | $ | 119,439 |
| | $ | 1,067,241 |
| | $ | 513,213 |
|
Cash received from options exercised | 68,665 |
| | 11,989 |
| | 201,419 |
| | 56,857 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| (in thousands) |
Total intrinsic value of options exercised | $ | 142,664 |
| | $ | 35,443 |
| | $ | 351,488 |
| | $ | 104,168 |
|
Cash received from options exercised | 34,669 |
| | 3,819 |
| | 73,673 |
| | 11,587 |
|
Stock-based Compensation
Stock options granted are exercisable for the full ten year contractual term regardless of employment status. The following table summarizes the assumptions used to value option grants using the lattice-binomial model and the valuation data:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Expected volatility | 45 | % | | 38 | % | | 37% - 45% |
| | 38% - 41% |
|
Risk-free interest rate | 0.67 | % | | 1.92 | % | | 0.67% - 1.71% |
| | 1.92% - 2.74% |
|
Suboptimal exercise factor | 3.62 |
| | 3.19 |
| | 3.34 - 3.62 |
| | 3.07 - 3.19 |
|
Weighted-average fair value (per share) | $ | 264 |
| | $ | 154 |
| | $ | 205 |
| | $ | 165 |
|
Total stock-based compensation expense (in thousands) | $ | 106,357 |
| | $ | 100,262 |
| | $ | 307,586 |
| | $ | 305,310 |
|
Total income tax impact on provision (in thousands) | $ | 24,292 |
| | $ | 22,679 |
| | $ | 68,435 |
| | $ | 69,152 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Dividend yield | — | % | | — | % | | — | % | | — | % |
Expected volatility | 34 | % | | 41 | % | | 34% - 37% |
| | 41% - 50% |
|
Risk-free interest rate | 2.24 | % | | 1.57 | % | | 2.24% - 2.45% |
| | 1.57% - 2.04% |
|
Suboptimal exercise factor | 2.58 |
| | 2.48 |
| | 2.48 - 2.58 |
| | 2.48 |
|
Weighted-average fair value (per share) | $ | 72.98 |
| | $ | 44.68 |
| | $ | 67.23 |
| | $ | 47.79 |
|
Total stock-based compensation expense (in thousands) | $ | 44,763 |
| | $ | 43,495 |
| | $ | 133,679 |
| | $ | 130,029 |
|
Total income tax impact on provision (in thousands) | $ | 14,428 |
| | $ | 16,294 |
| | $ | 43,606 |
| | $ | 48,828 |
|
The Company considers several factors in determining the suboptimal exercise factor, including the historical and estimated option exercise behavior.
The Company calculates expected volatility based solely on implied volatility. The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions, and given consistently high trade volumes of the options, can reasonably be expected to be a better indicator of expected volatility than historical volatility of its common stock.
In valuing shares issued under the Company’s employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero0 in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.
8. Accumulated Other Comprehensive Loss
The following table summarizes the changes in the accumulated balance of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | |
| Foreign currency | | Change in unrealized gains on available-for-sale securities | | Total |
| (in thousands) |
Balance as of June 30, 2017 | $ | (31,040 | ) | | $ | (328 | ) | | $ | (31,368 | ) |
Other comprehensive income before reclassifications | 5,678 |
| | 328 |
| | 6,006 |
|
Net decrease in other comprehensive loss | 5,678 |
| | 328 |
| | 6,006 |
|
Balances as of September 30, 2017 | $ | (25,362 | ) | | $ | — |
| | $ | (25,362 | ) |
|
| | | | | | | | | | | |
| Foreign currency | | Change in unrealized gains on available-for-sale securities | | Total |
| (in thousands) |
Balances as of December 31, 2016 | $ | (47,966 | ) | | $ | (599 | ) | | $ | (48,565 | ) |
Other comprehensive income before reclassifications | 22,604 |
| | 599 |
| | 23,203 |
|
Net decrease in other comprehensive loss | 22,604 |
| | 599 |
| | 23,203 |
|
Balances as of September 30, 2017 | $ | (25,362 | ) | | $ | — |
| | $ | (25,362 | ) |
The amounts reclassified from accumulated other comprehensive loss were immaterial for the three and nine months ended September 30, 2017.
9. Income Taxes
The |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands, except percentages) |
Provision for income taxes | | $ | 71,484 |
| | $ | 347,079 |
| | $ | 473,693 |
| | $ | 632,952 |
|
Effective tax rate | | 8 | % | | 34 | % | | 18 | % | | 33 | % |
On June 29, 2020, California enacted legislative changes that impose an annual cap of $5 million on the amount of business incentive tax credits the Company can utilize in California effective for tax rates for the three months endedyears 2020 through 2022.
As of September 30, 20172020, the Company had a California research and 2016 were (11)%development ("R&D") credit carryforward of $239 million which can be carried forward indefinitely. In the second quarter of 2020 we evaluated the Company’s ability to realize the California R&D credit, the Company considered all available positive and 35%, respectively. The effectivenegative evidence, including operating results, ongoing tax rates forplanning, and forecasts of future taxable income and determined it is more likely than not that the pre-2020 credits and a portion of the current year R&D credit would not be realized. In the nine months ended September 30, 20172020, the Company has recorded a valuation allowance of $239 million. The Company will monitor its business strategies, weighing positive and 2016 were (5)%negative evidence in assessing its realization of this asset in the future and 30%, respectively. in the event there is a need to release the valuation allowance, a tax benefit will be recorded.
The effective tax rates for the three and nine months ended September 30, 20172020 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits as a component of the provision for income taxes attributable to the adoption of ASU 2016-09 and Federal and California research and development ("R&D") credits,stock-based compensation, partially offset by state taxes, foreign taxes, and non-deductible expenses.the establishment of a valuation allowance on the California R&Dcredit in the second quarter of 2020. The effective tax rates for the three and nine months ended September 30, 20162019 differed from the Federal statutory rate primarily due to changes from the global corporate structure simplification, state taxes, foreign taxes, non-deductible expenses, and the international provisions of U.S. tax reform that became effective in 2018, partially offset by the recognition of excess tax benefits of stock-based compensation, and Federal and California R&D credits partially offset by state taxes, foreign taxes and non-deductible expenses. .
The decrease in effective tax raterates for the three and nine months ended September 30, 20172020, as compared to the same period in 20162019 was primarily due primarily to the United States Treasury issuance of final regulations that made certain aspects related to the Tax Cuts and Jobs Act of 2017 no longer applicable to the Company and the recognition of excess tax benefits attributableof stock-based compensation, partially offset by the establishment of a valuation allowance on the California R&D credit in the second quarter of 2020. For the three and nine months ended September 30, 2020, the Company recognized a discrete tax benefit related to the adoptionexcess tax benefits from stock-based compensation of ASU 2016-09$66 million and an increase in foreign income taxed at rates lower than$223 million, respectively, compared to the US statutory rate.three and nine months ended September 30, 2019 of $27 million and $114 million, respectively.
Gross unrecognized tax benefits were $37.2$85 million and $19.7$67 million as of September 30, 20172020 and December 31, 2016,2019, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $33.3$49 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of September 30, 2017,2020, gross unrecognized tax benefits of $15.8$24 million waswere classified as “Other non-current liabilities” and $21.4$30 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision (benefit) for income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision (benefit) for income taxes” were not material in any of the periods presented.
Deferred tax assets of $374.0$429 million and $227.2$658 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of September 30, 20172020 and December 31, 2016,2019, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of September 30, 2017, theThe Company has a valuation allowance of $33.1$371 million primarily due to foreign tax credit carryovers. Asand
$135 million as of September 30, 2020 and December 31, 2016, it was considered more likely than not that substantially all deferred tax assets would be realized.
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, the Company recorded a cumulative effect adjustment to increase retained earnings by $43.6 million with a corresponding increase to deferred tax assets for the Federal and state net operating losses attributable to excess tax benefits from stock-based compensation which had not been previously recognized. All excess tax benefits and deficiencies in the current and future periods will be recognized as income tax expense in the Company’s Consolidated Statement of Operations in the reporting period in which they occur. This will result in increased volatility in the Company’s effective tax rate. For the three and nine months ended September 30, 2017, the Company recognized a discrete tax benefit2019, respectively. The valuation allowance is related to the excessCalifornia R&D credits and certain foreign tax benefits from stock-based compensation of $41.7 million and $110.5 million, respectively.credits that the Company does not expect to realize.
The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for 20142016 through 2018 and 2015.is subject to examination for 2019. The 20082011 through 20152019 state tax returns are subject to examination by various state tax authorities. The Company is also currently under examination in the U.K. for 2018 and 2019. The Company has no other significant foreign jurisdiction audits underway. The years 20112014 through 20162019 remain subject to examination by foreign tax authorities.
Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
10. Segment and Geographic Information
The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. Segment information is presented in the same manner that the Company’soperates as 1 operating segment. The Company's chief operating decision maker ("CODM") reviewsis its co-chief executive officers, who review financial information presented on a consolidated basis for the purposes of making operating results indecisions, assessing financial performance and allocating resources. The Company’s CODM reviews revenues and contribution profit (loss) for each
On July 13, 2020, Ted Sarandos was appointed as co-Chief Executive Officer of the reportable segments. Contribution profit (loss) is definedCompany and serves as revenues less costChief Content Officer and co-Chief Executive Officer with Reed Hastings, the Company’s co-Chief Executive Officer, President, and Chairman of revenues and marketing expenses incurred by the segment.Board. The Company has aggregated the results of the International operating segments into one reportable segment because these operating segments share similar long-term economicdetermined that both Mr. Sarandos and other qualitative characteristics.
The Domestic streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members in the United States. The International streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members outside the United States. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail. RevenuesMr. Hastings are its CODM and the related payment card fees are attributedthat there have been no changes to the Company's one operating segment based on the nature of the underlying membership (streaming or DVD) and the geographic region from which the membership originates. There are no internal revenue transactions between the Company’s segments.
The vast majority of the cost of revenues relate to content expenses, which include the amortization of streaming content assets and other costs associated with the licensing and acquisition of streaming content. In connection withas the Company's global expansion, content acquired, licensed,financial results continue to be evaluated on a consolidated basis by its CODM.
Total U.S. revenues were $2.8 billion and produced increasingly includes global rights. The Company allocates this content between the International and Domestic streaming segments based on estimated fair market value. Content expenses for each streaming segment thus include both expenses directly incurred by the segment as well as an allocation of expenses incurred for global or multi-territory rights. Other costs of revenues such as
delivery costs are primarily attributed to the operating segment based on amounts directly incurred by the segment. Marketing expenses consist primarily of advertising expenses and certain payments made to marketing partners, including consumer electronics ("CE") manufacturers, multichannel video programming distributors ("MVPDs"), mobile operators and internet service providers ("ISPs"), which are generally included in the segment in which the expenditures are directly incurred.
The Company's long-lived tangible assets were located as follows:
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
United States | $ | 293,733 |
| | $ | 236,977 |
|
International | 28,688 |
| | 13,418 |
|
The following tables represent segment information$8.0 billion, respectively, for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | |
| As of/ Three Months Ended September 30, 2017 |
| Domestic Streaming | | International Streaming | | Domestic DVD | | Consolidated |
| (in thousands) |
Total memberships at end of period (1) | 52,772 |
| | 56,476 |
| | 3,569 |
| |
|
|
Revenues | $ | 1,547,210 |
| | $ | 1,327,435 |
| | $ | 110,214 |
| | $ | 2,984,859 |
|
Cost of revenues | 864,408 |
| | 1,081,485 |
| | 47,087 |
| | 1,992,980 |
|
Marketing | 128,901 |
| | 183,589 |
| | — |
| | 312,490 |
|
Contribution profit | $ | 553,901 |
| | $ | 62,361 |
| | $ | 63,127 |
| | $ | 679,389 |
|
Other operating expenses | | | | | | | 470,762 |
|
Operating income | | | | | | | 208,627 |
|
Other income (expense) | | | | | | | (92,390 | ) |
Benefit from income taxes | | | | | | | (13,353 | ) |
Net income | | | | | | | $ | 129,590 |
|
|
| | | | | | | | | | | | | | | |
| As of/ Nine Months Ended September 30, 2017 |
| Domestic Streaming | | International Streaming | | Domestic DVD | | Consolidated |
| (in thousands) |
Total memberships at end of period (1) | 52,772 |
| | 56,476 |
| | 3,569 |
| |
|
|
Revenues | $ | 4,522,751 |
| | $ | 3,538,862 |
| | $ | 345,345 |
| | $ | 8,406,958 |
|
Cost of revenues | 2,445,858 |
| | 2,946,414 |
| | 160,040 |
| | 5,552,312 |
|
Marketing | 357,547 |
| | 500,536 |
| | — |
| | 858,083 |
|
Contribution profit | $ | 1,719,346 |
| | $ | 91,912 |
| | $ | 185,305 |
| | $ | 1,996,563 |
|
Other operating expenses | | | | | | | 1,403,187 |
|
Operating income | | | | | | | 593,376 |
|
Other income (expense) | | | | | | | (239,385 | ) |
Benefit from income taxes | | | | | | | (19,421 | ) |
Net income | | | | | | | $ | 373,412 |
|
The following tables represent segment information2020, and $2.5 billion and $7.0 billion, respectively, for the three and nine months ended September 30, 2016:
|
| | | | | | | | | | | | | | | |
| As of/ Three Months Ended September 30, 2016 |
| Domestic Streaming | | International Streaming | | Domestic DVD | | Consolidated |
| (in thousands) |
Total memberships at end of period (1) | 47,497 |
| | 39,246 |
| | 4,273 |
| |
|
|
Revenues | $ | 1,304,333 |
| | $ | 853,480 |
| | $ | 132,375 |
| | $ | 2,290,188 |
|
Cost of revenues | 720,658 |
| | 748,515 |
| | 63,671 |
| | 1,532,844 |
|
Marketing | 108,495 |
| | 173,548 |
| | — |
| | 282,043 |
|
Contribution profit (loss) | $ | 475,180 |
| | $ | (68,583 | ) | | $ | 68,704 |
| | $ | 475,301 |
|
Other operating expenses | | | | | | | 369,265 |
|
Operating income | | | | | | | 106,036 |
|
Other income (expense) | | | | | | | (26,909 | ) |
Provision for income taxes | | | | | | | 27,610 |
|
Net income | | | | | | | $ | 51,517 |
|
|
| | | | | | | | | | | | | | | |
| As of/ Nine Months Ended September 30, 2016 |
| Domestic Streaming | | International Streaming | | Domestic DVD | | Consolidated |
| (in thousands) |
Total memberships at end of period (1) | 47,497 |
| | 39,246 |
| | 4,273 |
| |
|
|
Revenues | $ | 3,673,845 |
| | $ | 2,263,429 |
| | $ | 415,854 |
| | $ | 6,353,128 |
|
Cost of revenues | 2,094,310 |
| | 2,076,576 |
| | 204,596 |
| | 4,375,482 |
|
Marketing | 277,243 |
| | 428,839 |
| | — |
| | 706,082 |
|
Contribution profit (loss) | $ | 1,302,292 |
| | $ | (241,986 | ) | | $ | 211,258 |
| | $ | 1,271,564 |
|
Other operating expenses | | | | | | | 1,045,705 |
|
Operating income | | | | | | | 225,859 |
|
Other income (expense) | | | | | | | (55,621 | ) |
Provision for income taxes | | | | | | | 50,308 |
|
Net income | | | | | | | $ | 119,930 |
|
2019. See Note 2 Revenue Recognition for additional information about streaming revenue by region.The following table representsCompany's long-lived tangible assets, as well as the amortizationCompany's operating lease right-of-use assets recognized on the Consolidated Balance Sheets as of content assets:September 30, 2020 and December 31, 2019, were located as follows:
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
United States | $ | 2,111,158 |
| | $ | 1,503,459 |
|
International | 655,795 |
| | 594,047 |
|
|
| | | | | | | | | | | | | | | |
| Domestic Streaming | | International Streaming | | Domestic DVD | | Consolidated |
| (in thousands) |
Three months ended September 30, | | | | | | | |
2017 | $ | 727,832 |
| | $ | 899,645 |
| | $ | 13,259 |
| | $ | 1,640,736 |
|
2016 | 597,039 |
| | 627,069 |
| | 19,284 |
| | 1,243,392 |
|
Nine months ended September 30, | | | | | | | |
2017 | 2,033,268 |
| | 2,450,686 |
| | 48,368 |
| | 4,532,322 |
|
2016 | 1,709,168 |
| | 1,748,822 |
| | 59,746 |
| | 3,517,736 |
|
| |
(1) | A membership (also referred to as a subscription) is defined as the right to receive Netflix service following sign-up and a method of payment being provided. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company's internal systems, which utilize industry standard geo-location technology. The Company offers free-trial memberships to certain new and rejoining members. Total members include those who are on a free-trial as long as a method of payment has been provided. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations become effective at the end of the prepaid membership period, while involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately. |
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; thecontent amortization; impact of recently adopted accounting pronouncements; price changes and the Company’s response to, new accounting standards; content amortization; pricing changes;testing; dividends; impact of foreign currency and exchange rate fluctuations, including on net income, revenues and average revenues per paying member; deferred revenue; investments in global streaming,content, including original content; impact of content and pricing changes on membership growth; the impact of the discontinuance of the LIBO Rate; liquidity, including cash use in connection with the acquisition, licensingflows from operations, available funds and production of content; liquidityaccess to financing sources; net cash provided by (used in) operating activities and free cash flow; unrecognized tax benefits; deferred tax assets; effective tax rate; accessing and obtaining additional capital, including futureuse of the debt financing;market; accounting treatment for changes related to content assets; andnet income; future contractual obligations, including unknown streaming content obligations and timing of payments.payments; membership growth for the remainder of the fiscal year; and the impact of the coronavirus (COVID-19) pandemic and our response to it. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the Securities and Exchange Commission (“SEC”) on January 27, 2017,29, 2020, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA.IA, as updated in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.
Investors and others should note that we announce material financial information to our investors using our investor relations Web site (http://ir.netflix.com)website (netflixinvestor.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the United States ("U.S.") social media channels listed on our investor relations Web site.website.
Overview
We are the world’s leading internet television networksubscription streaming entertainment service with over 109195 million paid streaming membersmemberships in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films.films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.commercials. Additionally, we continue to offer our legacy DVD-by-mail service in the U.S., our members can receive DVDs delivered quickly to their homes.United States.
We are a pioneer in the internet delivery of TV shows and movies,streaming entertainment, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy TV shows and moviesentertainment directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of TV shows and movies directly over the internet. Historically, the first and fourth quarters (October through March) represent our greatest membership growth across our Domestic and International streaming segments. Our membership growth may be impacted by the release of certain high-profile original content, which may affect historical seasonal patterns. Internationally, we expect each market to demonstrate more predictable seasonal patterns as our service offering in each market becomes more established and we have a longer history to assess such patterns.entertainment.
Our core strategy is to grow our streaming membership business globally within the parameters of our profitoperating margin targets.target. We are continuously improving our members' experience by expanding our streaming content with a focus on a programming mix of content that delights our members and attracts new members. In addition, we are perpetuallycontinuously enhancing our user interface and extending our streaming service to more internet-connected screens. Our members can also download a selection of titles for offline viewing.
Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet-connected screens and when they tend to increase their viewing. Historically, the first and fourth quarters (October through March) represent our greatest streaming membership growth. In addition, our membership growth can be impacted by our content release schedule and changes to pricing.
Results of Operations
The following represents our consolidated performance highlights:
|
| | | | | | | | | | | | | | |
| As of/ Three Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| (in thousands, except revenue per membership and percentages)
|
Global streaming memberships at end of period | 109,248 |
| | 86,743 |
| | 22,505 |
| | 26 | % |
Global streaming average monthly revenue per paying membership | $ | 9.44 |
| | $ | 8.82 |
| | $ | 0.62 |
| | 7 | % |
Revenues | 2,984,859 |
| | 2,290,188 |
| | 694,671 |
| | 30 | % |
Global operating income | 208,627 |
| | 106,036 |
| | 102,591 |
| | 97 | % |
Global operating margin | 7.0 | % | | 4.6 | % | | 2.4 | % | | 52 | % |
Net income | 129,590 |
| | 51,517 |
| | 78,073 |
| | 152 | % |
|
| | | | | | | | | | | | | | |
| As of/ Three Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| (in thousands, except revenue per membership and percentages) |
Global Streaming Memberships: | | | | | | | |
Paid net membership additions | 2,204 |
| | 6,772 |
| | (4,568 | ) | | (67 | )% |
Paid memberships at end of period | 195,151 |
| | 158,334 |
| | 36,817 |
| | 23 | % |
Average paying memberships | 194,049 |
| | 154,948 |
| | 39,101 |
| | 25 | % |
Average monthly revenue per paying membership | $ | 10.95 |
| | $ | 11.13 |
| | $ | (0.18 | ) | | (2 | )% |
| | | | | | | |
Financial Results: | | | | | | | |
Streaming revenues | $ | 6,376,803 |
| | $ | 5,173,028 |
| | $ | 1,203,775 |
| | 23 | % |
DVD revenues | 58,834 |
| | 71,877 |
| | (13,043 | ) | | (18 | )% |
Total revenues | $ | 6,435,637 |
| | $ | 5,244,905 |
| | $ | 1,190,732 |
| | 23 | % |
| | | | | | | |
Operating income | $ | 1,314,863 |
| | $ | 980,239 |
| | $ | 334,624 |
| | 34 | % |
Operating margin | 20.4 | % | | 18.7 | % | | 1.7 | % | | 9 | % |
Paid net membership additions for the three months ended September 30, 2020 decreased 67% as compared to the three months ended September 30, 2019, in large extent due to the COVID-19 pandemic which contributed to significant paid net membership additions in the first half of 2020, and resulted in less growth in the third quarter of 2020 as compared to the prior year. While we are unable to accurately predict the impact of the pandemic on paid net membership additions in subsequent quarters, we expect less growth for the remainder of 2020 as compared to the prior year.
Consolidated revenues for the three months ended September 30, 20172020 increased $694.7 million23% as compared to the three months ended September 30, 20162019. The increase in our consolidated revenues was due to the 25% growth in the average number of paid streaming memberships globally, the majority of which waspaying memberships. The growth in our international memberships. In addition,paid memberships was partially offset by a 2% decrease in the average monthly revenue per paying streaming membership increased primarily due to price changes and plan mix. the strengthening of the U.S. dollar relative to certain foreign currencies.
The increase in operating income for the three months ended September 30, 2017margin is primarily due to increased revenues and decreased marketing costs, coupled with technology and development, and general and administrative costs growing at a slower rate as compared to the same period23% increase in 2016revenues. The increase in operating margin was due primarily to increased revenues partially offset by increased content expenses as we continue to acquire, license and produce content, including more Netflix originals,expenses related to the COVID-19 pandemic and expenses related to overall deals.
The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Item 1A: "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 for additional details. In an effort to protect the health and safety of our employees, our workforce has had and continues in most instances to spend a significant amount of time working from home, international travel has been severely curtailed and many of our productions remain paused or continue to experience disruption, as are the productions of our third-party content suppliers. Our other partners have similarly had their operations disrupted, including those partners that we use for our operations as well as increased headcount costsdevelopment, production, and post-production of content. While we and our partners have resumed productions and related operations in many parts of the world, our ability to support continued improvements inproduce content remains affected by the pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing. We anticipate that these actions and the global health crisis caused by COVID-19, including any resurgences, will continue to negatively impact business activity across the globe. While we have observed demand increases for our streaming entertainment service our international expansion, and increased content production activities. The increase in net income was comprised of an increase in operating income and an increase in the tax benefit primarily due to the adoption of ASU 2016-09 in the first half of 2020, we experienced less growth in the third quarter of 2017, partially offset2020 and we cannot estimate the impact COVID-19 will have in the future as business and consumer activity decelerates across the globe. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by an increasefederal, state, local or foreign authorities, or that we determine are in interest expense primarily due to the higher principal of notes outstanding and an increase in foreign exchange losses primarily due to the remeasurementbest interests of our euro denominated senior notes.employees, customers, partners and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, suppliers or vendors, or on our financial results.
Streaming Revenues
We derive revenues from monthly membership fees for services related to streaming content to our members. We offer three typesa variety of streaming membership plans. Inplans, the U.S.price of which varies by country and the features of the plan. As of September 30, 2020, pricing on our "basic" plan is priced at $7.99 per month and includes access to standard definition quality streaming on a single screen at a time. Our "standard" plan is our most popular streaming plan and is priced at $10.99 per month and includes access to high definition quality streaming on two screens concurrently. Our "premium" plan is priced at $13.99 per month and includes access to high definition and ultra-high definition quality content on four screens concurrently. Internationally, the membership plans are structured similarly to the U.S. and range in priceranged from the U.S. dollar equivalent of approximately $5.00$3 to $24 per month to $21.00 per month.
We expect that from time to time the prices of our membership plans in each country may change. For instance, in May 2014, in the U.S.,change and we increased themay test other plan and price of our standard plan from $7.99 per month to $8.99 per month with existing memberships grandfathered for a two year period. In October 2015, in the U.S., we increased the price of this same standard plan from $8.99 per month to $9.99 per month with existing memberships grandfathered for a one year period. In 2016, we phased out grandfathered pricing, giving members the option of electing the basic streaming plan at $7.99 per month, continuing on the standard streaming plan at the higher price of $9.99 per month, or electing the premium plan at $11.99 per month. In October 2017, in the U.S., we increased the price of our standard streaming plan from $9.99 to $10.99 per month and our premium plan from $11.99 to $13.99 per month.variations.
The following representstables summarize streaming revenue and other streaming membership information by region for the key elementsthree and nine months ended September 30, 2020 and September 30, 2019.
United States and Canada (UCAN)
Three months ended September 30, 2020 as compared to our segment results of operations:the three months ended September 30, 2019
We define contribution profit (loss) |
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 2,933,445 |
| | $ | 2,621,250 |
| | $ | 312,195 |
| | 12 | % |
Paid net membership additions | | 177 |
| | 613 |
| | (436 | ) | | (71 | )% |
Paid memberships at end of period | | 73,081 |
| | 67,114 |
| | 5,967 |
| | 9 | % |
Average paying memberships | | 72,993 |
| | 66,808 |
| | 6,185 |
| | 9 | % |
Average monthly revenue per paying membership | | $ | 13.40 |
| | $ | 13.08 |
| | $ | 0.32 |
| | 2 | % |
Constant currency change (1) | | | | | | | | 3 | % |
Nine months ended September 30, 2020 as revenues less cost of revenuescompared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 8,475,891 |
| | $ | 7,379,300 |
| | $ | 1,096,591 |
| | 15 | % |
Paid net membership additions | | 5,419 |
| | 2,357 |
| | 3,062 |
| | 130 | % |
Paid memberships at end of period | | 73,081 |
| | 67,114 |
| | 5,967 |
| | 9 | % |
Average paying memberships | | 71,082 |
| | 66,357 |
| | 4,725 |
| | 7 | % |
Average monthly revenue per paying membership | | $ | 13.25 |
| | $ | 12.36 |
| | $ | 0.89 |
| | 7 | % |
Constant currency change (1) | | | | | | | | 7 | % |
Europe, Middle East, and marketing expenses incurred byAfrica (EMEA)
Three months ended September 30, 2020 as compared to the segment.three months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 2,019,083 |
| | $ | 1,428,040 |
| | $ | 591,043 |
| | 41 | % |
Paid net membership additions | | 759 |
| | 3,126 |
| | (2,367 | ) | | (76 | )% |
Paid memberships at end of period | | 62,242 |
| | 47,355 |
| | 14,887 |
| | 31 | % |
Average paying memberships | | 61,863 |
| | 45,792 |
| | 16,071 |
| | 35 | % |
Average monthly revenue per paying membership | | $ | 10.88 |
| | $ | 10.40 |
| | $ | 0.48 |
| | 5 | % |
Constant currency change (1) | | | | | | | | 3 | % |
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 5,635,094 |
| | $ | 3,980,506 |
| | $ | 1,654,588 |
| | 42 | % |
Paid net membership additions | | 10,464 |
| | 9,537 |
| | 927 |
| | 10 | % |
Paid memberships at end of period | | 62,242 |
| | 47,355 |
| | 14,887 |
| | 31 | % |
Average paying memberships | | 59,076 |
| | 43,119 |
| | 15,957 |
| | 37 | % |
Average monthly revenue per paying membership | | $ | 10.60 |
| | $ | 10.26 |
| | $ | 0.34 |
| | 3 | % |
Constant currency change (1) | | | | | | | | 5 | % |
Latin America (LATAM)
Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 789,384 |
| | $ | 741,434 |
| | $ | 47,950 |
| | 6 | % |
Paid net membership additions | | 256 |
| | 1,490 |
| | (1,234 | ) | | (83 | )% |
Paid memberships at end of period | | 36,324 |
| | 29,380 |
| | 6,944 |
| | 24 | % |
Average paying memberships | | 36,196 |
| | 28,635 |
| | 7,561 |
| | 26 | % |
Average monthly revenue per paying membership | | $ | 7.27 |
| | $ | 8.63 |
| | $ | (1.36 | ) | | (16 | )% |
Constant currency change (1) | | | | | | | | 5 | % |
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 2,368,205 |
| | $ | 2,049,042 |
| | $ | 319,163 |
| | 16 | % |
Paid net membership additions | | 4,907 |
| | 3,303 |
| | 1,604 |
| | 49 | % |
Paid memberships at end of period | | 36,324 |
| | 29,380 |
| | 6,944 |
| | 24 | % |
Average paying memberships | | 34,752 |
| | 27,722 |
| | 7,030 |
| | 25 | % |
Average monthly revenue per paying membership | | $ | 7.57 |
| | $ | 8.21 |
| | $ | (0.64 | ) | | (8 | )% |
Constant currency change (1) | | | | | | | | 10 | % |
Asia-Pacific (APAC)
Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 634,891 |
| | $ | 382,304 |
| | $ | 252,587 |
| | 66 | % |
Paid net membership additions | | 1,012 |
| | 1,543 |
| | (531 | ) | | (34 | )% |
Paid memberships at end of period | | 23,504 |
| | 14,485 |
| | 9,019 |
| | 62 | % |
Average paying memberships | | 22,998 |
| | 13,714 |
| | 9,284 |
| | 68 | % |
Average monthly revenue per paying membership | | $ | 9.20 |
| | $ | 9.29 |
| | $ | (0.09 | ) | | (1 | )% |
Constant currency change (1) | | | | | | | | (1 | )% |
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 1,687,691 |
| | $ | 1,051,400 |
| | $ | 636,291 |
| | 61 | % |
Paid net membership additions | | 7,271 |
| | 3,878 |
| | 3,393 |
| | 87 | % |
Paid memberships at end of period | | 23,504 |
| | 14,485 |
| | 9,019 |
| | 62 | % |
Average paying memberships | | 20,732 |
| | 12,543 |
| | 8,189 |
| | 65 | % |
Average monthly revenue per paying membership | | $ | 9.05 |
| | $ | 9.31 |
| | $ | (0.26 | ) | | (3 | )% |
Constant currency change (1) | | | | | | | | (1 | )% |
(1) We believe thisconstant currency information is an important measureuseful in analyzing the underlying trends in average monthly revenue per paying membership. In order to exclude the effect of our operating segment performance as it representsforeign currency rate fluctuations on average monthly revenue per paying membership, we estimate current period revenue assuming foreign exchange rates had remained constant with foreign exchange rates from each segment's performance before global corporate costs.
of the corresponding months of the prior-year period. For the Domesticthree and International streaming segments, content expenses, which includenine months ended September 30, 2020, our revenues would have been approximately $158 million and $562 million higher, respectively, had foreign currency exchange rates remained constant with those for the amortizationthree and nine months ended September 30, 2019.
Cost of the streamingRevenues
Amortization of content assets and other expenses associated withmakes up the licensing and acquisition of streaming content, represent the vast majority of cost of revenues. StreamingExpenses associated with the acquisition, licensing and production of content (such as payroll and related personnel expenses, costs associated with obtaining rights were generally obtained forto music included in our current geographic regions. As we expanded internationally, we obtained additional rights for new geographies. With our global expansion, we now aspire to obtain global rights for our content. We allocate this content, between the Domesticoverall deals with talent, miscellaneous production related costs and International streaming segments based on estimated fair market value. Other cost of revenues such asparticipations and residuals), streaming delivery expenses, customer servicecosts and payment processing fees, including those we pay to our integrated payment partners, tend to be lower as a percentageother operations costs make up the remainder of total cost of revenues. We have built our own global content delivery network ("(“Open Connect"Connect”) to help us efficiently stream a high volume of content to our members over the internet. Streaming deliveryDelivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs, such as cloud computing costs, associated with delivering streaming content over the internet. CostOther operations costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs incurred in making our content available to members.
Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| (in thousands, except percentages) |
Cost of revenues | $ | 3,867,751 |
| | $ | 3,097,919 |
| | $ | 769,832 |
| | 25 | % |
As a percentage of revenues | 60 | % | | 59 | % | | | | |
The increase in cost of revenues was primarily due to a $454 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Expenses associated with the Domestic DVD segment consist primarilyacquisition, licensing and production of content increased $277 million, including expenses related to the COVID-19 pandemic and expenses related to overall deals. Streaming delivery expenses, content expenses, including amortization of DVD content assets and revenue sharing expenses,costs and other expensesoperations costs increased driven by our growing member base.
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| (in thousands, except percentages) |
Cost of revenues | $ | 11,111,159 |
| | $ | 8,974,190 |
| | $ | 2,136,969 |
| | 24 | % |
As a percentage of revenues | 61 | % | | 61 | % | | | | |
The increase in cost of revenues was primarily due to a $1,188 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Expenses associated with the acquisition, licensing and production of content increased $830 million, including expenses related to the COVID-19 pandemic and expenses related to overall deals. Streaming delivery costs and other operations costs increased driven by our DVD processing and customer service centers. Delivery expenses for the Domestic DVD segment consist of the postage costs to mail DVDs to and from our members and the packaging and label costs for the mailers.growing member base.
For the Domestic and International streaming segments, marketing
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing partners, including CEconsumer electronics ("CE") manufacturers, MVPDs,multichannel video programming distributors ("MVPDs"), mobile operators and ISPs.internet service providers ("ISPs"). Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses are incurred by our Domesticalso include payroll and related expenses for personnel that support marketing activities.
International streaming segments given our focus on building consumer awareness of the streaming offerings, and in particular our original content. Marketing expenses incurred by our International streaming segment have been significant and fluctuate dependent upon the number of international territories in which our streaming service is offered, the timing of the launch of new territories and the timing of content releases.
We have demonstrated our ability to grow domestic streaming contribution margin as evidenced by the increase in contribution margin from 17% in 2012 to 36% in the third quarter of 2017. As a result of our focus on growing the streaming segments, contribution margins for the Domestic and International streaming segments are lower than for our Domestic DVD segment.
Domestic Streaming Segment
Three months ended September 30, 20172020 as compared to the three months ended September 30, 20162019
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net additions | | 851 |
| | 368 |
| | 483 |
| | 131 | % |
Memberships at end of period | | 52,772 |
| | 47,497 |
| | 5,275 |
| | 11 | % |
Paid memberships at end of period | | 51,345 |
| | 46,479 |
| | 4,866 |
| | 10 | % |
Average monthly revenue per paying membership | | $ | 10.15 |
| | $ | 9.40 |
| | $ | 0.75 |
| | 8 | % |
| | | | | | | | |
Contribution profit: | | | | | | | | |
Revenues | | $ | 1,547,210 |
| | $ | 1,304,333 |
| | $ | 242,877 |
| | 19 | % |
Cost of revenues | | 864,408 |
| | 720,658 |
| | 143,750 |
| | 20 | % |
Marketing | | 128,901 |
| | 108,495 |
| | 20,406 |
| | 19 | % |
Contribution profit | | 553,901 |
| | 475,180 |
| | 78,721 |
| | 17 | % |
Contribution margin | | 36 | % | | 36 | % | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| (in thousands, except percentages) |
Marketing | $ | 527,597 |
| | $ | 553,797 |
| | $ | (26,200 | ) | | (5 | )% |
As a percentage of revenues | 8 | % | | 11 | % | | | | |
In the Domestic streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content to our members in the United States. The increase in our domestic streaming revenues was primarily due to the 10% growth in the average number of paid memberships, as well as an 8% increase in the average monthly revenue per paying membership, resulting from our price changes and plan mix. In the second half of 2016, we phased out grandfathered pricing and cancellations by members whose grandfathered pricing expired were not material. Our standard plan continues to be the most popular plan choice for new memberships.
The increasedecrease in domestic streaming cost of revenuesmarketing expenses was primarily due to a $136.5$25 million increasedecrease in content expenses relating to our existing and new streaming content, including more exclusive and original programming.advertising expenses.
Domestic marketing expenses increased primarily due to increased advertising and public relations.
Our Domestic streaming segment had a contribution margin of 36% for the three months ended September 30, 2017, which is flat compared to the contribution margin of 36% for the three months ended September 30, 2016.
Nine months ended September 30, 20172020 as compared to the nine months ended September 30, 2016
2019
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net additions | | 3,341 |
| | 2,759 |
| | 582 |
| | 21 | % |
Memberships at end of period | | 52,772 |
| | 47,497 |
| | 5,275 |
| | 11 | % |
Paid memberships at end of period | | 51,345 |
| | 46,479 |
| | 4,866 |
| | 10 | % |
Average monthly revenue per paying membership | | $ | 10.10 |
| | $ | 8.96 |
| | $ | 1.14 |
| | 13 | % |
| | | | | | | | |
Contribution profit: | | | | | | | | |
Revenues | | $ | 4,522,751 |
| | $ | 3,673,845 |
| | $ | 848,906 |
| | 23 | % |
Cost of revenues | | 2,445,858 |
| | 2,094,310 |
| | 351,548 |
| | 17 | % |
Marketing | | 357,547 |
| | 277,243 |
| | 80,304 |
| | 29 | % |
Contribution profit | | 1,719,346 |
| | 1,302,292 |
| | 417,054 |
| | 32 | % |
Contribution margin | | 38 | % | | 35 | % | | | | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| (in thousands, except percentages) |
Marketing | $ | 1,465,797 |
| | $ | 1,773,525 |
| | $ | (307,728 | ) | | (17 | )% |
As a percentage of revenues | 8 | % | | 12 | % | | | | |
The increasedecrease in our domestic streaming revenues was primarily due to the 9% growth in the average number of paid memberships, as well as a 13% increase in average monthly revenue per paying membership, resulting from our price changes and plan mix.
The increase in domestic streaming cost of revenuesmarketing expenses was primarily due to a $331.5$327 million increasedecrease in contentadvertising expenses, relating to our existing and new streaming content, including more exclusive and original programming.
Domestic marketing expenses increased primarily due to increased advertising and public relations.
Our Domestic streaming segment had a contribution margin of 38% for the nine months ended September 30, 2017, which increased as compared to the contribution margin of 35% for the nine months ended September 30, 2016 due to growth in paid memberships and revenue which continued to outpace content spending.
International Streaming Segment
Three months ended September 30, 2017 as compared to the three months ended September 30, 2016
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net additions | | 4,445 |
| | 3,198 |
| | 1,247 |
| | 39 | % |
Memberships at end of period | | 56,476 |
| | 39,246 |
| | 17,230 |
| | 44 | % |
Paid memberships at end of period | | 52,678 |
| | 36,799 |
| | 15,879 |
| | 43 | % |
Average monthly revenue per paying membership | | $ | 8.73 |
| | $ | 8.05 |
| | $ | 0.68 |
| | 8 | % |
| | | | | | | | |
Contribution profit (loss): | | | | | | | | |
Revenues | | $ | 1,327,435 |
| | $ | 853,480 |
| | $ | 473,955 |
| | 56 | % |
Cost of revenues | | 1,081,485 |
| | 748,515 |
| | 332,970 |
| | 44 | % |
Marketing | | 183,589 |
| | 173,548 |
| | 10,041 |
| | 6 | % |
Contribution profit (loss) | | 62,361 |
| | (68,583 | ) | | 130,944 |
| | 191 | % |
Contribution margin | | 5 | % | | (8 | )% | | | |
|
|
In the International streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content to our members outside the United States. We launched our streaming service in Canada in September 2010 and have expanded our services internationally as shown below.
![internationaltimelinea02.jpg](https://files.docoh.com/10-Q/0001065280-17-000180/internationaltimelinea02.jpg)
The increase in our international revenues was due to the 43% growth in the average number of paid international memberships, in addition to an 8% increase in the average monthly revenue per paying membership. The increase in the average monthly revenue per paying membership was due to price changes and plan mix coupled with favorable fluctuations in foreign exchange rates. We estimate that international revenues in the third quarter of 2017 would have been approximately $13.3 million lower if foreign exchange rates had remained consistent with the foreign exchange rates from the third quarter of 2016. If foreign currency exchange rates fluctuate more than expected, revenues and average revenue per paying membership may differ from our expectations. Average paid international streaming memberships accounted for 50% of global average paid streaming memberships for the three months ended September 30, 2017, as compared to 43% of global average paid streaming memberships for the same period in 2016.
The increase in international cost of revenues was primarily due to a $298.3 million increase in content expenses relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $34.7 million primarily due to increases in our streaming delivery expenses, costs associated with our customer service call centers and payment processing fees, all drivenpartially offset by our growing member base.
International marketing expenses increased mainly due to increased advertising and public relations as well as increased payments to our marketing partners.
International contribution profit for the three months ended September 30, 2017 was $62.4 million as compared to a contribution loss of $68.6 million for the three months ended September 30, 2016 as profit growth in our more mature markets offset investments in newer markets.
Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net additions | | 12,111 |
| | 9,222 |
| | 2,889 |
| | 31 | % |
Memberships at end of period | | 56,476 |
| | 39,246 |
| | 17,230 |
| | 44 | % |
Paid memberships at end of period | | 52,678 |
| | 36,799 |
| | 15,879 |
| | 43 | % |
Average monthly revenue per paying membership | | $ | 8.39 |
| | $ | 7.70 |
| | $ | 0.69 |
| | 9 | % |
| | | | | | | | |
Contribution profit (loss): | | | | | | | | |
Revenues | | $ | 3,538,862 |
| | $ | 2,263,429 |
| | $ | 1,275,433 |
| | 56 | % |
Cost of revenues | | 2,946,414 |
| | 2,076,576 |
| | 869,838 |
| | 42 | % |
Marketing | | 500,536 |
| | 428,839 |
| | 71,697 |
| | 17 | % |
Contribution profit (loss) | | 91,912 |
| | (241,986 | ) | | 333,898 |
| | 138 | % |
Contribution margin | | 3 | % | | (11 | )% | | | | |
The increase in our international revenues was due to the 44% growth in our average number of paid international memberships, in addition to a 9% increase in the average monthly revenue per paying membership. The increase in the average monthly revenue per paying membership was due to price changes and plan mix, partially offset by unfavorable fluctuations in foreign exchange rates. We estimate that international revenues in the nine months ended September 30, 2017 would have been approximately $21.0 million higher if foreign exchange rates had remained consistent with the foreign exchange rates for the nine months ended September 30, 2016.
The increase in international cost of revenues was primarily due to a $769.7 million increase in content expenses relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $100.2 million primarily due to
increases in our streaming delivery expenses, costs associated with our customer service call centers and payment processing fees, all driven by our growing member base, partially offset by decreases resulting from exchange rate fluctuations.
International marketing expenses for the nine months ended September 30, 2017 increased mainly due to increased advertising and public relations, as well as increased payments to our partners.
International contribution profit grew to $91.9 million as opposed to a $242.0 million loss for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as profit growth in our more mature markets offset investments in newer markets.
Domestic DVD Segment
Three months ended September 30, 2017 as compared to the three months ended September 30, 2016
|
| | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net losses | | (189 | ) | | (257 | ) | | 68 |
| | 26 | % |
Memberships at end of period | | 3,569 |
| | 4,273 |
| | (704 | ) | | (16 | )% |
Paid memberships at end of period | | 3,520 |
| | 4,194 |
| | (674 | ) | | (16 | )% |
Average monthly revenue per paying membership | | $ | 10.19 |
| | $ | 10.23 |
| | $ | (0.04 | ) | | — | % |
| | | | | | | | |
Contribution profit: | | | | | | | | |
Revenues | | $ | 110,214 |
| | $ | 132,375 |
| | $ | (22,161 | ) | | (17 | )% |
Cost of revenues | | 47,087 |
| | 63,671 |
| | (16,584 | ) | | (26 | )% |
Contribution profit | | 63,127 |
| | 68,704 |
| | (5,577 | ) | | (8 | )% |
Contribution margin | | 57 | % | | 52 | % | | | | |
In the Domestic DVD segment, we derive revenues from our DVD-by-mail membership services. The price per plan for DVD-by-mail varies from $4.99 to $14.99 per month according to the plan chosen by the member. DVD-by-mail plans differ by the number of DVDs that a member may have out at any given point. Members electing access to high definition Blu-ray discs, in addition to standard definition DVDs, pay a surcharge ranging from $2 to $3 per month for our most popular plans.
Our Domestic DVD segment contribution margin was 57% for the three months ended September 30, 2017, as compared to 52% for the three months ended September 30, 2016, due to the decreased DVD usage by paying members and decreased DVD content expenses.
Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | |
| | As of/ Nine Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 |
| | (in thousands, except revenue per membership and percentages) |
Memberships: | | | | | | | | |
Net losses | | (545 | ) | | (631 | ) | | 86 |
| | 14 | % |
Memberships at end of period | | 3,569 |
| | 4,273 |
| | (704 | ) | | (16 | )% |
Paid memberships at end of period | | 3,520 |
| | 4,194 |
| | (674 | ) | | (16 | )% |
Average monthly revenue per paying membership | | $ | 10.16 |
| | $ | 10.21 |
| | $ | (0.05 | ) | | — | % |
| | | | | | | | |
Contribution profit: | | | | | | | | |
Revenues | | $ | 345,345 |
| | $ | 415,854 |
| | $ | (70,509 | ) | | (17 | )% |
Cost of revenues | | 160,040 |
| | 204,596 |
| | (44,556 | ) | | (22 | )% |
Contribution profit | | 185,305 |
| | 211,258 |
| | (25,953 | ) | | (12 | )% |
Contribution margin | | 54 | % | | 51 | % | | | | |
Our Domestic DVD segment contribution margin was 54% for the nine months ended September 30, 2017, as compared to 51% for the nine months ended September 30, 2016, due to the decreased DVD usage by paying members and decreased DVD content expenses.
Consolidated Operating ExpensesTechnology and Development
Technology and development expenses consist of payroll and related expenses for all technology personnel, as well as other costs incurred in making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendation, merchandising and streaming delivery technology and infrastructure. Technology and development expenses also include costs associated with computer hardware and software.
Three months ended September 30, 20172020 as compared to the three months ended September 30, 2016
2019
| | | Three Months Ended | | Change | Three Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| (in thousands, except percentages) | (in thousands, except percentages) |
Technology and development | $ | 255,236 |
| | $ | 216,099 |
| | $ | 39,137 |
| | 18 | % | $ | 453,802 |
| | $ | 379,776 |
| | $ | 74,026 |
| | 19 | % |
As a percentage of revenues | 9 | % | | 9 | % | | | | | 7 | % | | 7 | % | | | | |
The increase in technology and development expenses was primarily due to a $67 million increase in personnel-related costs, including increases in compensation for existing employees and growth in average headcount to support the increase in our production activity and continued improvements in our streaming service.
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
| September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| (in thousands, except percentages) |
Technology and development | $ | 1,342,664 |
| | $ | 1,135,773 |
| | $ | 206,891 |
| | 18 | % |
As a percentage of revenues | 7 | % | | 8 | % | | | | |
The increase in technology and development expenses was primarily due to a $22.9$188 million increase in personnel-related costs, including stock-based compensation expense, resulting from an increaseincreases in compensation for existing employees and a 2% growth in average headcount supportingto support the increase in our production activity and continued improvements in our streaming service and our international expansion. In addition, third party expenses, including costs associated with cloud computing, increased $8.7 million.service.
Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 |
| (in thousands, except percentages) |
Technology and development | $ | 779,427 |
| | $ | 626,907 |
| | $ | 152,520 |
| | 24 | % |
As a percentage of revenues | 9 | % | | 10 | % | | | | |
The increase in technology and development expenses was primarily due to a $101.2 million increase in personnel-related costs, including stock-based compensation expense, resulting from an increase in compensation for existing employees and a 3% growth in average headcount supporting continued improvements in our streaming service and our international expansion. In addition, third party expenses, including costs associated with cloud computing, increased $30.6 million.
General and Administrative
General and administrative expenses consist of payroll and related expenses for corporate personnel, as well aspersonnel. General and administrative expenses also include professional fees and other general corporate expenses.
Three months ended September 30, 20172020 as compared to the three months ended September 30, 2016
2019
| | | Three Months Ended | | Change | Three Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| (in thousands, except percentages) | (in thousands, except percentages) |
General and administrative | $ | 215,526 |
| | $ | 153,166 |
| | $ | 62,360 |
| | 41 | % | $ | 271,624 |
| | $ | 233,174 |
| | $ | 38,450 |
| | 16 | % |
As a percentage of revenues | 7 | % | | 7 | % | | | | | 4 | % | | 4 | % | | | | |
General and administrative expenses increased primarily due to a $37.6$32 million increase in personnel-related costs, including stock-based compensation expense, resulting from a 50% increase in average headcount primarily to support our international and original content expansion, and an increaseincreases in compensation for existing employees. In addition, facilities-related costs increased $8.2 million, primarily driven by costs foremployees and growth in average headcount to support the increase in our expanded Los Gatos, California headquartersproduction activity and new Los Angeles, California facility, both of which were placed into operationcontinued improvements in the first quarter of 2017. In addition, third party expenses increased $14.1 million.our streaming service.
Nine months ended September 30, 20172020 as compared to the nine months ended September 30, 2016
2019
| | | Nine Months Ended | | Change | Nine Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| (in thousands, except percentages) | (in thousands, except percentages) |
General and administrative | $ | 623,760 |
| | $ | 418,798 |
| | $ | 204,962 |
| | 49 | % | $ | 800,947 |
| | $ | 659,783 |
| | $ | 141,164 |
| | 21 | % |
As a percentage of revenues | 7 | % | | 7 | % | | | | | 4 | % | | 4 | % | | | | |
General and administrative expenses increased primarily due to a $135.0$118 million increase in personnel-related costs, including stock-based compensation expense, resulting from a 54% increase in average headcount primarily to support our international and original content expansion, and an increaseincreases in compensation for existing employees. In addition, facilities-related costs increased $36.2 million, primarily driven by costs foremployees and growth in average headcount to support the increase in our expanded Los Gatos, California headquartersproduction activity and new Los Angeles, California facility, both of which were placed into operationcontinued improvements in the first quarter of 2017. In addition, third party expenses increased $31.0 million.our streaming service.
Interest Expense
Interest expense consists primarily of the interest associated with our outstanding long-term debt obligations, including the amortization of debt issuance costs, as well as interestcosts. See Note 6 Debt in the accompanying notes to our consolidated financial statements for further detail on our lease financingdebt obligations.
Three months ended September 30, 20172020 as compared to the three months ended September 30, 20162019
| | | | Three Months Ended | | Change | | Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 | | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Interest expense | | $ | (60,688 | ) | | $ | (35,536 | ) | | $ | (25,152 | ) | | (71 | )% | | $ | 197,079 |
| | $ | 160,660 |
| | $ | 36,419 |
| | 23 | % |
As a percentage of revenues | | (2 | )% | | (2 | )% | | | | | | 3 | % | | 3 | % | | | | |
Nine months ended September 30, 20172020 as compared to the nine months ended September 30, 20162019
| | | | Nine Months Ended | | Change | | Nine Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 | | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Interest expense | | $ | (162,912 | ) | | $ | (106,528 | ) | | $ | (56,384 | ) | | (53 | )% | | $ | 570,313 |
| | $ | 448,222 |
| | $ | 122,091 |
| | 27 | % |
As a percentage of revenues | | (2 | )% | | (2 | )% | | | | | | 3 | % | | 3 | % | | | | |
Interest expense primarily consistedconsists of interest on our Notes of $58.4$191 million and $156.5$556 million for the three and nine months ended September 30, 2017.2020, respectively. The increase in interest expense for the three and nine months ended September 30, 20172020 as compared to the three and nine months ended September 30, 20162019 was primarily due to the higher average aggregate principal of interest bearing notes outstanding.increase in debt.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of foreign exchange gains and losses on foreign currency denominated balances and interest earned on cash and cash equivalents and short-term investments.equivalents.
Three months ended September 30, 20172020 as compared to the three months ended September 30, 20162019
| | | | Three Months Ended | | Change | | Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 | | September 30, 2020 | | September 30, 2019 | | Q3'20 vs. Q3'19 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Interest and other income (expense) | | $ | (31,702 | ) | | $ | 8,627 |
| | $ | (40,329 | ) | | (467 | )% | | $ | (256,324 | ) | | $ | 192,744 |
| | $ | (449,068 | ) | | (233 | )% |
As a percentage of revenues | | (1 | )% | | — | % | | | | | | (4 | )% | | 4 | % | | | | |
Nine months ended September 30, 20172020 as compared to the nine months ended September 30, 2016
2019
| | | | Nine Months Ended | | Change | | Nine Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 | | September 30, 2020 | | September 30, 2019 | | YTD'20 vs. YTD'19 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Interest and other income (expense) | | $ | (76,473 | ) | | $ | 50,907 |
| | $ | (127,380 | ) | | (250 | )% | | $ | (367,802 | ) | | $ | 215,378 |
| | $ | (583,180 | ) | | (271 | )% |
As a percentage of revenues | | (1 | )% | | 1 | % | | | | | | (2 | )% | | 1 | % | | | | |
Interest and other income (expense) decreased forin the three and nine months ended September 30, 2017,2020 primarily due to foreign exchange losses of $35.3$258 million and $84.7$397 million, respectively, compared to gains of $6.4$170 million and $44.6$161 million, respectively, for the corresponding periods in 2016.2019. In the three and nine months ended September 30, 2017,2020, the foreign exchange losses were primarily driven by the $50.8losses of $249 million and $115.1$275 million, respectively, loss from the remeasurement of our €1,300.0€5,170 million Senior Notes, coupled with the remeasurement of
cash and content liability positions in currencies other than the functional currencies. In the three and nine months ended September 30, 2019, the foreign exchange gains were primarily driven by the gains of $171 million and $168 million, respectively, from the remeasurement of our €3,600 million Senior Notes, partially offset by the remeasurement of cash and content liability positions in currencies other than the functional currencies of our European and U.S. entities.currencies.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | (in thousands, except percentages) |
Provision for income taxes | | $ | 71,484 |
| | $ | 347,079 |
| | $ | 473,693 |
| | $ | 632,952 |
|
Effective tax rate | | 8 | % | | 34 | % | | 18 | % | | 33 | % |
On June 29, 2020, California enacted legislative changes that impose an annual cap of $5 million on the amount of business incentive tax credits we can utilize in California effective for tax years 2020 through 2022.
As of September 30, 2020, we had a California research and development ("R&D") credit carryforward of $239 million which can be carried forward indefinitely. In the second quarter of 2020 we evaluated our ability to realize the California R&D credit, and considered all available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income and determined it is more likely than not that the pre-2020 credits and a portion of the current year R&D credit would not be realized. In the nine months ended September 30, 2020, we recorded a valuation allowance of $239 million. We will monitor our business strategies, weighing positive and negative evidence in assessing the realization of this asset in the future and in the event there is a need to release the valuation allowance, a tax benefit will be recorded.
The effective tax rates for the three and nine months ended September 30, 2017 and 2016 were (11)% and 35%, respectively. The effective tax rate for the three months ended September 30, 20172020 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits attributable to the adoption of ASU 2016-09 and Federal and California research and development ("R&D") creditsstock-based compensation, partially offset by state taxes, foreign taxes, and non-deductible expenses. The effective tax rate for the three months ended September 30, 2016, differed fromestablishment of a valuation allowance on the Federal statutory rate primarily due to the Federal and California R&D credits partially offset by state taxes, foreign taxes and non-deductible expenses. credit in the second quarter of 2020.
The decrease in our effective tax raterates for the three and nine months ended September 30, 2017,2020, as compared to the same period in 20162019 was primarily due primarily to the recognitionUnited States Treasury issuance of the excess tax benefits attributablefinal regulations that made certain aspects related to the adoptionTax Cuts and Jobs Act of ASU 2016-092017 no longer applicable to the Company and an increase in foreign income taxed at rates lower than the U.S. statutory rate.
The effective tax rates for the nine months ended September 30, 2017 and 2016 were (5)% and 30%, respectively. The effective tax rates for the nine months ended September 30, 2017, differed from the Federal statutory rate primarily due to the recognition of excess tax benefits attributable toof stock-based compensation, partially offset by the adoptionestablishment of ASU 2016-09 and Federal anda valuation allowance on the California R&D credits, partially offset by state taxes, foreign taxes and non-deductible expenses. The effective tax rate forcredit in the nine months ended September 30, 2016, differed from the Federal statutory rate primarily due to the Federal and California research and development credits partially offset by state taxes, foreign taxes and non-deductible expenses. The decrease in our effective tax rate for the nine months ended September 30, 2017 as compared to the same period in 2016 was attributable primarily due to the recognitionsecond quarter of the excess tax benefits attributable to the adoption of ASU 2016-09 and an increase in foreign income taxed at rates lower than the U.S. statutory rate.2020.
Liquidity and Capital Resources
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Cash, cash equivalents and restricted cash | $ | 8,422,280 |
| | $ | 5,043,786 |
|
Short-term and long-term debt | 16,047,133 |
| | 14,759,260 |
|
Cash, and cash equivalents was $1,746.5 million as of September 30, 2017, which increased $12.7 million as compared to cash, cash equivalents and short-term investments of $1,733.8restricted cash increased $3,378 million as of December 31, 2016. The increase in the nine months ended September 30, 2017 was2020 primarily due to cash provided by operations coupled with the issuance of debt.
Debt, net of debt issuance costs, increased $1,288 million primarily due to the proceeds from the issuance of debt partially offset by cash used in operations.
Our primary usesApril 2020 coupled with the remeasurement of cash include the acquisition, licensingour euro-denominated notes. The amount of principal and production of content, streaming delivery, marketing programs and personnel-related costs. Investmentsinterest due in original content, and in particular content that we produce and own, require more cash upfront relative to licensed content. We expect to significantly increase our investments in global streaming content, particularly in original content, which will impact our liquidity and result in future negative free cash flows for many years. We currently anticipate that cash flows from operations, available funds and access to financing sources, including our revolving credit facility, will continue to be sufficient to meet our cash needs for at least the next twelve months.
In July 2017, we entered into a $500.0 million unsecured revolving credit facility (“Revolving Credit Agreement”), with an uncommitted incremental facility to increase the amount of the revolving credit facility by up to an additional $250.0 million subject to certain terms and conditions.months is $1,259 million. As of September 30, 2017,2020, no amounts had been borrowed under the $750 million Revolving Credit Agreement. See Note 56 Debt in the accompanying notes to theour consolidated financial statements for additional information.
In May 2017, we issued €1,300.0 million of long-term debt. Long-term debt, net of debt issuance costs, was $4,888.8 million and $3,364.3 million as of September 30, 2017, and December 31, 2016, respectively. See Note 5 to the consolidated financial statements for additional information.statements. We anticipate financingcontinuing to finance our future capital needs, if any, in the debt market, as our after-tax cost of debt is lower than our cost of equity.market. Our ability to obtain this or any additional financing that we may choose to, or need to, obtain will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. If we raise additional funds through the issuance of equity or debt
securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.
As
Our primary uses of September 30, 2017, cash include the acquisition, licensing and production of content, streaming delivery, marketing programs and personnel-related costs. Cash payment terms for non-original content have historically been in line with the amortization period. Investments in original content, and in particular content that we produce and own, require more cash equivalents held by our foreign subsidiaries amountedupfront relative to $443.7 million. If these fundslicensed content. For example, production costs are needed for our operationspaid as the content is created, well in advance of when the U.S., we would be required to accrue and pay U.S. income taxes and foreign withholding taxescontent is available on the portion associated with undistributed earningsservice and amortized. We expect to continue to significantly increase our investments in global content, particularly in original content, which will impact our liquidity and result in future net cash used in operating activities and negative free cash flow. We currently anticipate that cash flows from operations, available funds and access to financing sources, including our revolving credit facility, will continue to be sufficient to meet our cash needs for certain foreign subsidiaries.at least the next twelve months.
Free Cash Flow
We define free cash flow as cash provided by (used in) operating and investing activities excluding the non-operational cash flows from purchases, maturities and sales of short-term investments.activities. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certain other activities or the amount of cash used in operations, including investments in global streaming content. Free cash flow is considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, cash flow provided by (used in) provided by operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.
In assessing liquidity in relation to our results of operations, we compare free cash flow to net income, noting that the three major recurring differences are excess content payments over expense,amortization, non-cash stock-based compensation expense and other working capital differences. The excess content payments over expense is variable based on the payment terms of our content agreements and is expected to increase as we enter into more agreements with upfront cash payments, such as licensing and production of original content. Working capital differences include deferred revenue, excess property and equipment purchases over depreciation, taxes and semi-annual interest payments on our outstanding debt. Our receivables from membersMembership fees due are generally settle quickly and deferred revenue is a source of cash flow.collected quickly.
Three months ended September 30, 20172020 as compared to the three months ended September 30, 20162019
|
| | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 2016 |
| (in thousands) |
Net cash used in operating activities | $ | (419,607 | ) | | $ | (461,941 | ) |
Net cash provided by investing activities | 202,192 |
| | 23,976 |
|
Net cash provided by financing activities | 34,422 |
| | 16,639 |
|
| | | |
Non-GAAP free cash flow reconciliation: | | | |
Net cash used in operating activities | (419,607 | ) | | (461,941 | ) |
Acquisition of DVD content assets | (10,217 | ) | | (17,249 | ) |
Purchases of property and equipment | (33,963 | ) | | (27,366 | ) |
Change in other assets | (1,107 | ) | | 125 |
|
Non-GAAP free cash flow | $ | (464,894 | ) | | $ | (506,431 | ) |
|
| | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Net cash provided by (used in) operating activities | $ | 1,263,761 |
| | $ | (501,794 | ) |
Net cash used in investing activities | (118,651 | ) | | (49,354 | ) |
Net cash provided by financing activities | 68,665 |
| | 11,989 |
|
| | | |
Non-GAAP reconciliation of free cash flow: | | | |
Net cash provided by (used in) operating activities | 1,263,761 |
| | (501,794 | ) |
Net cash used in investing activities | (118,651 | ) | | (49,354 | ) |
Free cash flow | $ | 1,145,110 |
| | $ | (551,148 | ) |
Cash usedWhile we and our partners have resumed productions and related operations in many parts of the world, our ability to produce content remains affected by the pandemic. As a result, the timing of certain production payments has been and will continue to be delayed until productions can resume and may be shifted to future years. Net cash provided by operating activities decreased $42.3increased $1,766 million to $419.6$1,264 million for the three months ended September 30, 2017,2020. The increase in cash provided by operating activities was primarily driven by a $1,191 million or 23% increase in revenues coupled with a decrease in cash payments for content assets. The payments for content assets decreased $710 million, from $3,744 million to $3,033 million, or 19%, as compared to the same periodincrease in the amortization of 2016. The decreased usecontent assets of cash was due primarily$454 million, from $2,280 million to a $694.7$2,734 million, or 30% increase in revenues, partially offset by the increase in investments in streaming content that requires more upfront payments. The payments for streaming content assets increased $437.4 million or 23%20%. In addition, we had increased payments associated with higher operating expenses.expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion.
Cash provided byNet cash used in investing activities increased $178.2$69 million for the three months ended September 30, 2020, primarily due to a $179.0the increase in purchases of property and equipment.
Net cash provided by financing activities increased $57 million for the three months ended September 30, 2020, due to an increase in the proceeds from the sale of short-term investments. In July 2017, the Company sold all short-term investments.
Cash provided by financing activities increased $17.8 million in the quarter ended September 30, 2017, due to an increase in cash received from the issuance of common stock, partially offset by a decrease in excess tax benefits from stock-based compensation due to the adoption of ASU 2016-09 in the first quarter of 2017.stock.
Free cash flow was $594.5$355 million higher than net income for the three months ended September 30, 2020 primarily due to $300 million favorable working capital differences, $249 million of non-cash remeasurement loss on our euro-denominated debt and $106 million of non-cash stock-based compensation expense, partially offset by $300 million of cash payments for content assets over amortization expense.
Free cash flow was $1,216 million lower than net income for the three months ended September 30, 20172019, primarily due to $722.1$1,464 million of cash payments for streaming content assets over streaming amortization expense, partially offset by $44.8$148 million favorable working capital differences and $100 million of non-cash stock-based compensation expense and $82.8 million of favorable other working capital differences.
Free cash flow was $557.9 million lower than net income for the three months ended September 30, 2016, primarily due to $688.1 million of cash payments for streaming content assets over streaming amortization expense partially offset by $43.5 million of non-cash stock-based compensation expense and $86.7 million favorable other working capital differences.expense.
Nine months ended September 30, 20172020 as compared to the nine months ended September 30, 20162019
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | September 30, 2016 |
| (in thousands) |
Net cash used in operating activities | $ | (1,297,991 | ) | | $ | (916,824 | ) |
Net cash provided by investing activities | 70,170 |
| | 25,343 |
|
Net cash provided by financing activities | 1,479,047 |
| | 49,158 |
|
| | | |
Non-GAAP free cash flow reconciliation: | | | |
Net cash used in operating activities | (1,297,991 | ) | | (916,824 | ) |
Acquisition of DVD content assets | (43,213 | ) | | (58,380 | ) |
Purchases of property and equipment | (151,717 | ) | | (46,605 | ) |
Change in other assets | (2,940 | ) | | 676 |
|
Non-GAAP free cash flow | $ | (1,495,861 | ) | | $ | (1,021,133 | ) |
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| (in thousands) |
Net cash provided by (used in) operating activities | $ | 2,564,749 |
| | $ | (1,425,347 | ) |
Net cash used in investing activities | (358,955 | ) | | (179,493 | ) |
Net cash provided by financing activities | 1,203,324 |
| | 2,281,861 |
|
| | | |
Non-GAAP reconciliation of free cash flow: | | | |
Net cash provided by (used in) operating activities | 2,564,749 |
| | (1,425,347 | ) |
Net cash used in investing activities | (358,955 | ) | | (179,493 | ) |
Free cash flow | $ | 2,205,794 |
| | $ | (1,604,840 | ) |
Cash usedWhile we and our partners have resumed productions and related operations in many parts of the world, our ability to produce content remains affected by the pandemic. As a result, the timing of certain production payments has been and will continue to be delayed until productions can resume and may be shifted to future years. Net cash provided by operating activities increased $381.2$3,990 million to $1,298.0$2,565 million for the nine months ended September 30, 2017,2020. The increase in cash provided by operating activities was primarily driven by a $3,663 million or 25% increase in revenues coupled with a decrease in cash payments for content assets. The payments for content assets decreased $1,406 million, from $10,094 million to $8,688 million, or 14% as compared to the same period of 2016. The significant net cash used in operations is due primarily to the increase in investments in streaming content that requires more upfront payments. The payments for streamingthe amortization of content assets increased $1,605.2of $1,188 million, from $6,637 million to $7,824 million, or 33%18%. In addition, we had increased payments associated with higher operating expenses. Theexpenses, primarily related to increased use ofheadcount to support our continued improvements in our streaming service and our international expansion.
Net cash was partially offset by a $2,053.8 million or 32% increaseused in revenues.
Cash provided by investing activities increased $44.8$179 million for the nine months ended September 30, 2020, primarily due to anthe increase in the proceeds from the sale and maturities of short-term investments of $138.4 million, net of purchases, coupled with an increase in the purchases of property and equipment of $105.1 million, primarily related to the expansion of our Los Gatos, California headquarters and our new Los Angeles, California facility.equipment.
CashNet cash provided by financing activities increased $1,429.9decreased $1,079 million in the nine months ended September 30, 2017,2020, due to thea decrease in proceeds from the issuance of debt of $1,405.2from $2,225 million, net of $15.3$18 million issuance costs in the nine months ended September 30, 2019, to $1,002 million, net of $8 million issuance costs.costs in the nine months ended September 30, 2020.
Free cash flow was $1,869.3$13 million lower than net income for the nine months ended September 30, 20172020 primarily due to $1,997.6$864 million of cash payments for streaming content assets over streaming amortization expense, coupled with $5.4 million non-favorable other working capital differences, partially offset by $133.7$275 million of non-cash remeasurement loss on our euro-denominated debt, $239 million non-cash valuation allowance for deferred taxes due to recent legislation which imposed an annual cap on research and development credits, $308 million of non-cash stock-based compensation expenses.expenses and $29 million favorable other working capital differences.
Free cash flow was $1,141.1$2,885 million lower than net income for the nine months ended September 30, 2016,2019, primarily due to $1,418.3$3,457 million of cash payments for streaming content assets over streaming amortization expense, partially offset by $130.0$267 million favorable other working capital differences and $305 million of non-cash stock-based compensation expense and $147.2 million favorable other working capital differences.expenses.
Contractual Obligations
For the purpose of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of the payment of the obligations discussed below is estimated based on information available to us as of September 30, 2017.2020. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. The following table summarizes our contractual obligations as of September 30, 2017:2020:
| | | Payments due by Period | Payments due by Period |
Contractual obligations (in thousands): | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Streaming content obligations (1) | $ | 16,991,930 |
| | $ | 6,984,360 |
| | $ | 7,918,009 |
| | $ | 1,918,123 |
| | $ | 171,438 |
| |
Content obligations (1) | | $ | 19,072,254 |
| | $ | 8,668,296 |
| | $ | 8,004,624 |
| | $ | 1,956,565 |
| | $ | 442,769 |
|
Debt (2) | 6,708,200 |
| | 237,108 |
| | 469,578 |
| | 1,622,849 |
| | 4,378,665 |
| 21,882,995 |
| | 1,258,639 |
| | 2,136,439 |
| | 3,612,818 |
| | 14,875,099 |
|
Lease obligations (3) | 727,508 |
| | 96,224 |
| | 184,905 |
| | 157,762 |
| | 288,617 |
| |
Operating lease obligations (3) | | 2,801,946 |
| | 332,028 |
| | 629,071 |
| | 567,453 |
| | 1,273,394 |
|
Other purchase obligations (4) | 642,821 |
| | 368,214 |
| | 198,418 |
| | 46,560 |
| | 29,629 |
| 1,020,860 |
| | 762,225 |
| | 248,487 |
| | 10,148 |
| | — |
|
Total | $ | 25,070,459 |
|
| $ | 7,685,906 |
| | $ | 8,770,910 |
| | $ | 3,745,294 |
| | $ | 4,868,349 |
| $ | 44,778,055 |
|
| $ | 11,021,188 |
| | $ | 11,018,621 |
| | $ | 6,146,984 |
| | $ | 16,591,262 |
|
| |
(1) | As of September 30, 2017, streaming2020, content obligations were comprised of $4.1$4.6 billion included in "Current content liabilities" and $3.3$2.9 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $9.6$11.6 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not then meet the criteria for recognition. |
Streaming content obligations increased $2.5 billion from $14.5 billion as of December 31, 2016 to $17.0 billion as of September 30, 2017, primarily due to multi-year commitments associated with the continued expansion of our exclusive and original programming.
Streaming contentContent obligations include amounts related to the acquisition, licensing and production of streaming content. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements.agreements and other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time we enter into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of these types of agreements. The contractual obligations table above does not include any estimated obligation for the unknown future titles, payment for which could range from less than one year to more than five years. However, these unknown obligations are expected to be significant and we believe could include approximately $3$1 billion to $5$4 billion over the next three years, with the payments for the vast majority of such amounts expected to occur after the next twelve months. The foregoing range is based on considerable management judgments and the actual amounts may differ. Once we know the title that we will receive and the license fees, we include the amount in the contractual obligations table above.
| |
(2) | Long-term debtDebt obligations include our Notes consisting of principal and interest payments. See Note 56 to the consolidated financial statements for further details. |
| |
(3) | Lease obligations include lease financing obligations of $16.4 million relatedSee Note 5 to a portion of our current Los Gatos, California headquartersthe consolidated financial statements for which we are the deemed owner for accounting purposes, commitments of $519.3 million for our expanded headquarters in Los Gatos, California, and our new office space in Los Angeles, California and other commitments of $191.8 million for facilities under non-cancelable operatingfurther details regarding leases. These leases have expiration dates varying through approximately 2028. |
| |
(4) | Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to streaming delivery DVD content acquisition, and cloud computing costs, as well as other miscellaneous open purchase orders for which we have not received the related services or goods. |
As of September 30, 2017,2020, we had gross unrecognized tax benefits of $37.2$85 million, of which $24 million was classified in “Other non-current liabilities” and $30 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the consolidated balance sheets.Consolidated Balance Sheets. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
Off-Balance Sheet Arrangements
We do not have transactions with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.
Indemnification
The information set forth under Note 67 to the consolidated financial statements under the caption “Indemnification” is incorporated herein by reference.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and Exchange Commission ("SEC")SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Streaming Content
We acquire, license and produce content, including original programing, in order to offer our members unlimited viewing of TV shows and films.entertainment. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to streamingcontent assets and the changes in related liabilities, are classified within "Net cash used inprovided by (used in) operating activities" on the Consolidated Statements of Cash Flows.
We recognize content assets (licensed and produced) as "Content assets, net" on the Consolidated Balance Sheets. For licenseslicensed content, we capitalize the fee per title and record a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known and the title is accepted and available for streaming. The portion available for streaming within one year is recognized as “CurrentFor produced content, assets, net” and the remaining portion as “Non-current content assets, net” on the Consolidated Balance Sheets.
For productions, we capitalize costs associated with the production, including development cost, direct costs and production overhead. We include these amounts in "Non-current content assets, net" on the Consolidated Balance Sheets. Participations and residuals are expensed in line with the amortization of production costs.
Based on factors including historical and estimated viewing patterns, we amortize the content assets (licensed and produced) in “Cost of revenues” on the Consolidated Statements of Operations over the shorter of each title's contractual window of availability or estimated period of use or ten years, beginning with the month of first availability. The amortization periodis on an accelerated basis, as we typically ranges from six months to five years. For content where we expect more upfront viewing, for instance due to the additional merchandising and marketing efforts, we amortize on anand film amortization is more accelerated basis.than TV series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized within four years after its month of first availability. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable management judgment.
Our business model is subscription based as opposed to a model generating revenues at a specific title level. Therefore, contentContent assets both licensed(licensed and producedproduced) are predominantly monetized as a group and therefore are reviewed in aggregate at the operating segmenta group level when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than amortizedunamortized cost. To date, we have not identified any such event or changes in circumstances. If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost net realizable value or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off. No material write-down from unamortized cost was recorded in any of the periods presented.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. As of September 30, 2017, there was a valuation allowance of $33.1 million primarily related to foreign tax credit carryovers. There was no valuation allowance as of September 30, 2016.
Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Actual operating results in future years could differ from our current assumptions, judgments and estimates. In the eventHowever, we were to determinebelieve that we wouldit is more likely than not be able to realize all or partthat most of our net deferred tax assets in the future, an adjustment to the deferred tax assets wouldrecorded on our Consolidated Balance
Sheets will ultimately be chargedrealized. We record a valuation allowance to earnings inreduce our deferred tax assets to the period in whichnet amount that we make such determination.believe is more likely than not to be realized. As of September 30, 2020, the valuation allowance of $371 million was related to the California research and development credits and certain foreign tax credits that we do not expect to realize.
We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At September 30, 2017,2020, our estimated gross unrecognized tax benefits were $37.2$85 million of which $33.3$49 million, if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 9 to the consolidated financial statements for further information regarding income taxes.
Stock-Based Compensation
We grant fully vested non-qualified stock options to our employees on a monthly basis. As a result of immediate vesting, stock-based compensation expense is fully recognized on the grant date, and no estimate is required for post-vesting option forfeitures. Stock-based compensation expense at the grant date is based on the total number of options granted and an estimate of the fair value of the awards.
We calculate the fair value of our stock option grants using a lattice-binomial model. This model requires the input of highly subjective assumptions. Changes in the subjective input assumptions can materially affect the estimate of fair value of options granted and our results of operations could be impacted.
Expected Volatility: The Company calculates expected volatility based solely on implied volatility. We believe that implied volatility of publicly traded options in our common stock is more reflective of market conditions and, given consistently high trade volumes of the options, can reasonably be expected to be a better indicator of expected volatility than historical volatility of our common stock. An increase/decrease of 10% in our computation of expected volatility would increase/decrease the total stock-based compensation expense by approximately $5.7 million for the three months ended September 30, 2017.
Suboptimal Exercise Factor: Our computation of the suboptimal exercise factor is based on historical and estimated option exercise behavior. An increase/decrease in the suboptimal exercise factor of 10% would increase/decrease the total stock-based compensation expense by approximately $1.1 million for the three months ended September 30, 2017.
Recent Accounting Pronouncements
The information set forth under Note 1 to the consolidated financial statements under the caption “Basis of Presentation and Summary of Significant Accounting Policies” is incorporated herein by reference.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
For financial market risks related to changes in interest rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2016.2019. Our exposure to market risk has not changed significantly since December 31, 2016.2019.
Foreign Currency Risk
International revenues and cost of revenues account for 42% and 53%, respectively, of consolidated amounts for the nine months ended September 30, 2017. The majority of international revenues and a smaller portion of expenses areRevenues denominated in currencies other than the U.S. dollar and weaccount for 54% of the consolidated amount for the nine months ended September 30, 2020. We therefore have foreign currency risk related to these currencies, which are primarily the euro, the British pound, the Brazilian real, the Canadian dollar, the Mexican Peso, the Australian dollar, the Japanese yen, and the Brazilian real.Argentine peso.
Accordingly, changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our revenue and contribution profit (loss) of our International streaming segmentoperating income as expressed in U.S. dollars. In the nine months ended September 30, 2017, we believe2020, our international revenues would have been approximately $21.0$562 million higher had foreign currency exchange rates remained consistent with those in same period of 2016.2019.
We have also experienced and will continue to experience fluctuations in our net income as a result of gains (losses) on the settlement and the remeasurement of monetary assets and liabilities denominated in currencies that are not the functional currency. In the nine months ended September 30, 2017,2020, we recognized an $84.7a $397 million foreign exchange loss which resulted primarily fromdue to the remeasurement of our €1,300.0 million Senior Notes and was partially offset bydenominated in euros, coupled with the remeasurement of cash and content liability positionsliabilities denominated in currencies other than the functional currencies of our European and U.S. entities.currencies.
In addition, the effect of exchange rate changes on cash, and cash equivalents inand restricted cash as disclosed on the Consolidated Statements of Cash Flow for the nine months ended September 30, 20172020 was $27.7a decrease of $31 million.
We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Our continued international expansion increases our exposure to exchange rate fluctuations and, as a result, such fluctuations could have a significant impact on our future results of operations.
| |
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
The information set forth under Note 67 in the notes to the consolidated financial statements under the caption “Legal Proceedings” is incorporated herein by reference.
There have been no material changes from the risk factors as previously disclosed under the heading “Risk Factors”"Risk Factors" in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016.2019, as updated in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
(a) Exhibits:
See Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
|
| | | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Incorporated by Reference | | Filed Herewith |
| | | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | | | | | | | | | | |
| | | | 10-Q | | 001-35727 | | 3.1 | | July 17, 2015 | | |
| | | | | | | | | | | | |
| | | | 8-K | | 001-35727 | | 3.1 | | September 4, 2020 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
101 | | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Stockholders' Equity and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags | | | | | | | | | | X |
| | | | | | | | | | | | |
104 | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL | | | | | | | | | | X |
| |
* | These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | NETFLIX, INC. |
Dated: | October 18, 201722, 2020 | By: | /s/ REED HASTINGSReed Hastings |
| | | Reed Hastings ChiefCo-Chief Executive Officer
(Principal executive officer) |
| | | |
Dated: | October 18, 201722, 2020 | By: | /s/ DAVID WELLSSpencer Neumann |
| | | David WellsSpencer Neumann
Chief Financial Officer (Principal financial and accounting officer) |
EXHIBIT INDEX
|
| | | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Incorporated by Reference | | Filed Herewith |
| | | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | | | | | |
| |
| | | | 001-35727 | | 10.14 | | July 19, 2017 | | |
| | | | | | | | | | | | |
| |
| | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
101 | | The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the SEC on October 18, 2017, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016, (ii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (iii) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (iv) Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2017 and 2016 and (v) the Notes to the Consolidated Financial Statements. | | | | | | | | | | X |
| |
* | These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |