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, 2017March 31, 2023
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
| | | |
121 Albright Way, | Los Gatos, | California | 95032 |
(Address and zip code of principal executive offices) | (Zip Code) |
(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. Yes x☒ 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). Yes x☒ 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,March 31, 2023, there were 432,731,130444,536,878 shares of the registrant’s common stock, par value $0.001, outstanding.
Table of Contents
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| | Page |
| Part I. Financial Information | |
Item 1. | | |
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| | Page |
| Part I. Financial Information | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| Part II. Other Information | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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| | |
NETFLIX, INC.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Revenues | $ | 8,161,503 | | | $ | 7,867,767 | | | | | |
Cost of revenues | 4,803,625 | | | 4,284,705 | | | | | |
Marketing | 555,362 | | | 555,978 | | | | | |
Technology and development | 687,275 | | | 657,530 | | | | | |
General and administrative | 400,924 | | | 397,928 | | | | | |
Operating income | 1,714,317 | | | 1,971,626 | | | | | |
Other income (expense): | | | | | | | |
Interest expense | (174,239) | | | (187,579) | | | | | |
Interest and other income (expense) | (71,204) | | | 195,645 | | | | | |
Income before income taxes | 1,468,874 | | | 1,979,692 | | | | | |
Provision for income taxes | (163,754) | | | (382,245) | | | | | |
Net income | $ | 1,305,120 | | | $ | 1,597,447 | | | | | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 2.93 | | | $ | 3.60 | | | | | |
Diluted | $ | 2.88 | | | $ | 3.53 | | | | | |
Weighted-average shares of common stock outstanding: | | | | | | | |
Basic | 445,244 | | | 444,146 | | | | | |
Diluted | 452,417 | | | 452,984 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Revenues | $ | 2,984,859 |
| | $ | 2,290,188 |
| | $ | 8,406,958 |
| | $ | 6,353,128 |
|
Cost of revenues | 1,992,980 |
| | 1,532,844 |
| | 5,552,312 |
| | 4,375,482 |
|
Marketing | 312,490 |
| | 282,043 |
| | 858,083 |
| | 706,082 |
|
Technology and development | 255,236 |
| | 216,099 |
| | 779,427 |
| | 626,907 |
|
General and administrative | 215,526 |
| | 153,166 |
| | 623,760 |
| | 418,798 |
|
Operating income | 208,627 |
| | 106,036 |
| | 593,376 |
| | 225,859 |
|
Other income (expense): | | | | | | | |
Interest expense | (60,688 | ) | | (35,536 | ) | | (162,912 | ) | | (106,528 | ) |
Interest and other income (expense) | (31,702 | ) | | 8,627 |
| | (76,473 | ) | | 50,907 |
|
Income before income taxes | 116,237 |
| | 79,127 |
| | 353,991 |
| | 170,238 |
|
Provision for (benefit from) income taxes | (13,353 | ) | | 27,610 |
| | (19,421 | ) | | 50,308 |
|
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
|
Earnings per share: | | | | | | | |
Basic | $ | 0.30 |
| | $ | 0.12 |
| | $ | 0.87 |
| | $ | 0.28 |
|
Diluted | $ | 0.29 |
| | $ | 0.12 |
| | $ | 0.84 |
| | $ | 0.27 |
|
Weighted-average common shares outstanding: | | | | | | | |
Basic | 432,404 |
| | 428,937 |
| | 431,473 |
| | 428,514 |
|
Diluted | 447,362 |
| | 438,389 |
| | 446,367 |
| | 438,180 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Net income | $ | 1,305,120 | | | $ | 1,597,447 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 25,611 | | | (33,675) | | | | | |
| | | | | | | |
Comprehensive income | $ | 1,330,731 | | | $ | 1,563,772 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net income | $ | 129,590 |
| | $ | 51,517 |
| | $ | 373,412 |
| | $ | 119,930 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 5,678 |
| | 2,357 |
| | 22,604 |
| | 5,453 |
|
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 |
|
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 | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 1,305,120 | | | $ | 1,597,447 | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Additions to content assets | (2,458,666) | | | (3,584,164) | | | | | |
Change in content liabilities | (354,791) | | | (347,149) | | | | | |
Amortization of content assets | 3,459,984 | | | 3,166,365 | | | | | |
Depreciation and amortization of property, equipment and intangibles | 90,335 | | | 74,602 | | | | | |
Stock-based compensation expense | 99,099 | | | 119,209 | | | | | |
Foreign currency remeasurement loss (gain) on debt | 80,651 | | | (161,821) | | | | | |
Other non-cash items | 120,008 | | | 101,968 | | | | | |
Deferred income taxes | (98,782) | | | (68,906) | | | | | |
Changes in operating assets and liabilities: | | | | | | | |
Other current assets | (88,522) | | | 41,157 | | | | | |
Accounts payable | (89,668) | | | (215,444) | | | | | |
Accrued expenses and other liabilities | 185,299 | | | 350,763 | | | | | |
Deferred revenue | (2,390) | | | 16,743 | | | | | |
Other non-current assets and liabilities | (68,937) | | | (167,931) | | | | | |
Net cash provided by operating activities | 2,178,740 | | | 922,839 | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of property and equipment | (62,019) | | | (121,158) | | | | | |
| | | | | | | |
Acquisitions | — | | | (124,521) | | | | | |
Purchases of short-term investments | (201,634) | | | — | | | | | |
Net cash used in investing activities | (263,653) | | | (245,679) | | | | | |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Repayments of debt | — | | | (700,000) | | | | | |
Proceeds from issuance of common stock | 26,028 | | | 13,678 | | | | | |
Repurchases of common stock | (400,101) | | | — | | | | | |
Net cash used in financing activities | (374,073) | | | (686,322) | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 26,423 | | | (11,448) | | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 1,567,437 | | | (20,610) | | | | | |
Cash, cash equivalents and restricted cash at beginning of period | 5,170,582 | | | 6,055,111 | | | | | |
Cash, cash equivalents and restricted cash at end of period | $ | 6,738,019 | | | $ | 6,034,501 | | | | | |
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Balance Sheets
(in thousands, except share and par value data)
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 6,714,594 | | | $ | 5,147,176 | |
Short-term investments | 1,112,910 | | | 911,276 | |
Other current assets | 2,655,119 | | | 3,208,021 | |
Total current assets | 10,482,623 | | | 9,266,473 | |
Content assets, net | 32,349,184 | | | 32,736,713 | |
Property and equipment, net | 1,413,094 | | | 1,398,257 | |
Other non-current assets | 5,245,444 | | | 5,193,325 | |
Total assets | $ | 49,490,345 | | | $ | 48,594,768 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Current content liabilities | $ | 4,344,580 | | | $ | 4,480,150 | |
Accounts payable | 591,987 | | | 671,513 | |
Accrued expenses and other liabilities | 1,718,069 | | | 1,514,650 | |
Deferred revenue | 1,262,271 | | | 1,264,661 | |
Short-term debt | 399,163 | | | — | |
Total current liabilities | 8,316,070 | | | 7,930,974 | |
Non-current content liabilities | 2,908,029 | | | 3,081,277 | |
Long-term debt | 14,037,965 | | | 14,353,076 | |
Other non-current liabilities | 2,400,085 | | | 2,452,040 | |
Total liabilities | 27,662,149 | | | 27,817,367 | |
Commitments and contingencies (Note 7) | | | |
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 4,990,000,000 shares authorized at March 31, 2023 and December 31, 2022; 444,536,878 and 445,346,776 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 4,762,395 | | | 4,637,601 | |
Treasury stock at cost (2,786,534 and 1,564,478 shares at March 31, 2023 and December 31, 2022, respectively) | (1,228,920) | | | (824,190) | |
Accumulated other comprehensive loss | (191,695) | | | (217,306) | |
Retained earnings | 18,486,416 | | | 17,181,296 | |
Total stockholders’ equity | 21,828,196 | | | 20,777,401 | |
Total liabilities and stockholders’ equity | $ | 49,490,345 | | | $ | 48,594,768 | |
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| (unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,746,469 |
| | $ | 1,467,576 |
|
Short-term investments | — |
| | 266,206 |
|
Current content assets, net | 4,223,387 |
| | 3,726,307 |
|
Other current assets | 415,492 |
| | 260,202 |
|
Total current assets | 6,385,348 |
| | 5,720,291 |
|
Non-current content assets, net | 9,739,704 |
| | 7,274,501 |
|
Property and equipment, net | 322,421 |
| | 250,395 |
|
Other non-current assets | 504,067 |
| | 341,423 |
|
Total assets | $ | 16,951,540 |
| | $ | 13,586,610 |
|
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Current content liabilities | $ | 4,142,086 |
| | $ | 3,632,711 |
|
Accounts payable | 301,443 |
| | 312,842 |
|
Accrued expenses | 331,723 |
| | 197,632 |
|
Deferred revenue | 535,425 |
| | 443,472 |
|
Total current liabilities | 5,310,677 |
| | 4,586,657 |
|
Non-current content liabilities | 3,296,504 |
| | 2,894,654 |
|
Long-term debt | 4,888,783 |
| | 3,364,311 |
|
Other non-current liabilities | 128,215 |
| | 61,188 |
|
Total liabilities | 13,624,179 |
| | 10,906,810 |
|
Commitments and contingencies (Note 6) |
|
| |
|
|
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 |
|
Accumulated other comprehensive loss | (25,362 | ) | | (48,565 | ) |
Retained earnings | 1,545,600 |
| | 1,128,603 |
|
Total stockholders’ equity | 3,327,361 |
| | 2,679,800 |
|
Total liabilities and stockholders’ equity | $ | 16,951,540 |
| | $ | 13,586,610 |
|
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
Total stockholders' equity, beginning balances | | $ | 20,777,401 | | | $ | 15,849,248 | | | | | |
| | | | | | | | |
Common stock and additional paid-in capital: | | | | | | | | |
Beginning balances | | $ | 4,637,601 | | | $ | 4,024,561 | | | | | |
Issuance of common stock upon exercise of options | | 25,695 | | | 11,810 | | | | | |
Stock-based compensation expense | | 99,099 | | | 119,209 | | | | | |
Ending balances | | $ | 4,762,395 | | | $ | 4,155,580 | | | | | |
| | | | | | | | |
Treasury stock: | | | | | | | | |
Beginning balances | | $ | (824,190) | | | $ | (824,190) | | | | | |
Repurchases of common stock to be held as treasury stock | | (404,730) | | | — | | | | | |
Ending balances | | $ | (1,228,920) | | | $ | (824,190) | | | | | |
| | | | | | | | |
Accumulated other comprehensive loss: | | | | | | | | |
Beginning balances | | $ | (217,306) | | | $ | (40,495) | | | | | |
Other comprehensive income (loss) | | 25,611 | | | (33,675) | | | | | |
Ending balances | | $ | (191,695) | | | $ | (74,170) | | | | | |
| | | | | | | | |
Retained earnings: | | | | | | | | |
Beginning balances | | $ | 17,181,296 | | | $ | 12,689,372 | | | | | |
Net income | | 1,305,120 | | | 1,597,447 | | | | | |
Ending balances | | $ | 18,486,416 | | | $ | 14,286,819 | | | | | |
| | | | | | | | |
Total stockholders' equity, ending balances | | $ | 21,828,196 | | | $ | 17,544,039 | | | | | |
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, 20162022 filed with the Securities and Exchange Commission (the “SEC”) on January 27, 2017.26, 2023. 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 streamingamortization of content asset amortization policy;assets 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, 2016.2022. 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, 2016.2022.
Recently adopted accounting pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. 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 2016-09 requires that the Company present excess tax benefits on the Statement of Cash Flows as an operating activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. The Company adopted ASU 2016-09 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 basis and the impact on its consolidated financial statements was not material.
2. Revenue Recognition
Recently issued accounting pronouncements not yet adopted
In May 2014, 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 transfer 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). The Company will adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. Because 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. However, if there is no distinct service provided in exchange for the payments made to the partners or if 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 revenues, paid net membership additions, and ending paid memberships by region for the three months ended March 31, 2023 and March 31, 2022, respectively:
United States and Canada (UCAN)
| | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | (in thousands) |
Revenues | | $ | 3,608,645 | | | $ | 3,350,424 | | | | | |
Paid net membership additions (losses) | | 102 | | | (636) | | | | | |
Paid memberships at end of period (1) | | 74,398 | | | 74,579 | | | | | |
| | | | | | | | |
| | | | | | | | |
Europe, Middle East, and Africa (EMEA)
| | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | (in thousands) |
Revenues | | $ | 2,517,641 | | | $ | 2,561,831 | | | | | |
Paid net membership additions (losses) | | 644 | | | (303) | | | | | |
Paid memberships at end of period (1) | | 77,373 | | | 73,733 | | | | | |
| | | | | | | | |
| | | | | | | | |
Latin America (LATAM)
| | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | (in thousands) |
Revenues | | $ | 1,070,192 | | | $ | 998,948 | | | | | |
Paid net membership additions (losses) | | (450) | | | (351) | | | | | |
Paid memberships at end of period (1) | | 41,249 | | | 39,610 | | | | | |
| | | | | | | | |
| | | | | | | | |
Asia-Pacific (APAC)
| | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | (in thousands) |
Revenues | | $ | 933,523 | | | $ | 916,754 | | | | | |
Paid net membership additions (losses) | | 1,455 | | | 1,087 | | | | | |
Paid memberships at end of period (1) | | 39,478 | | | 33,719 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | |
(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 certain other promotions that may be offered by the Company to new or rejoining members. Certain members have the option to add extra member sub accounts. These extra member sub accounts are not included in paid memberships. 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, become 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 $3.3 billion and $3.1 billion for the three months ended March 31, 2023 and 2022, respectively. DVD revenues were $32 million and $40 million for the three months ended March 31, 2023 and 2022, respectively.
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 March 31, 2023, total deferred revenue was $1,262 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) in ordernext month. The remaining deferred revenue balance, which is related to increase transparencygift cards and comparability among organizations by recognizing lease assets and lease liabilities onother prepaid memberships, will be recognized as revenue over the period of service after redemption, which is expected to occur over the next 12 months. Total deferred revenue as of March 31, 2023 remained relatively flat as compared to the balance sheet for those leases classifiedof $1,265 million as operating leases under previousof December 31, 2022.
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
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 outstanding shares of common shares outstandingstock during the period. Potential shares of common sharesstock consist of incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| (in thousands, except per share data) |
Basic earnings per share: | | | | | | | |
Net income | $ | 1,305,120 | | | $ | 1,597,447 | | | | | |
Shares used in computation: | | | | | | | |
Weighted-average shares of common stock outstanding | 445,244 | | | 444,146 | | | | | |
Basic earnings per share | $ | 2.93 | | | $ | 3.60 | | | | | |
| | | | | | | |
Diluted earnings per share: | | | | | | | |
Net income | $ | 1,305,120 | | | $ | 1,597,447 | | | | | |
Shares used in computation: | | | | | | | |
Weighted-average shares of common stock outstanding | 445,244 | | | 444,146 | | | | | |
Employee stock options | 7,173 | | | 8,838 | | | | | |
Weighted-average number of shares | 452,417 | | | 452,984 | | | | | |
Diluted earnings per share | $ | 2.88 | | | $ | 3.53 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 shares of common sharesstock excluded from the diluted calculation:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| (in thousands) |
Employee stock options | 5,847 | | | 2,749 | | | | | |
|
| | | | | | | | | | | |
| 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 |
|
3.4. Cash, Cash Equivalents, Restricted Cash, and Short-term Investments
In July 2017,The Company’s investment policy is consistent with the definition of available-for-sale securities. The Company does not buy and hold securities principally for the purpose of selling them in the near future. The Company’s policy is focused on the preservation of capital, liquidity and return. From time to time, the Company sold allmay sell certain securities but the objectives are generally not to generate profits on short-term investments. As of September 30, 2017, $13.9 million and $1.3 million of money market funds, classified as Level 1 securities, were includeddifferences in Cash andprice. The following tables summarize the Company's cash, cash equivalents, restricted cash and Non-current assets, respectively, onshort-term investments as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Cash and cash equivalents | | Short-term investments | | Other Current Assets | | Non-current Assets | | Total |
| (in thousands) |
Cash | $ | 3,787,630 | | | $ | — | | | $ | 3,889 | | | $ | 19,483 | | | $ | 3,811,002 | |
Level 1 securities: | | | | | | | | | |
Money market funds | 2,561,649 | | | — | | | — | | | 53 | | | $ | 2,561,702 | |
Level 2 securities: | | | | | | | | | |
Time Deposits (1) | 365,315 | | | 1,112,910 | | | — | | | — | | | $ | 1,478,225 | |
| | | | | | | | | |
| $ | 6,714,594 | | | $ | 1,112,910 | | | $ | 3,889 | | | $ | 19,536 | | | $ | 7,850,929 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Cash and cash equivalents | | Short-term investments | | Other Current Assets | | Non-current Assets | | Total |
| (in thousands) |
Cash | $ | 4,071,584 | | | $ | — | | | $ | 3,410 | | | $ | 19,874 | | | $ | 4,094,868 | |
Level 1 securities: | | | | | | | | | |
Money market funds | 569,826 | | | — | | | — | | | 122 | | | 569,948 | |
Level 2 securities: | | | | | | | | | |
Time Deposits (1) | 505,766 | | | 911,276 | | | — | | | — | | | 1,417,042 | |
| | | | | | | | | |
| $ | 5,147,176 | | | $ | 911,276 | | | $ | 3,410 | | | $ | 19,996 | | | $ | 6,081,858 | |
(1) The majority of the Company's Consolidated Balance Sheet. Additionally, $3.6 million oftime deposits are domestic deposits, which mature within one year.
Other current assets include 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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
(1) Primarily restricted cash that isfor deposits related to workers compensation depositsself insurance 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 Non-current assets include restricted cash related to each security in the Company’s available-for-sale portfolio and cash equivalents is based on its assessmentletter of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date.credit agreements. 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 securitiesshort-term investments 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 5 6 Debt 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, 2017March 31, 2023 and 2016,2022, respectively.
5. Balance Sheet Components
Content Assets, Net
Content assets consisted of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
Licensed content, net | $ | 12,533,388 | | | $ | 12,732,549 | |
| | | |
Produced content, net | | | |
Released, less amortization | 9,306,337 | | | 9,110,518 | |
In production | 9,872,138 | | | 10,255,940 | |
In development and pre-production | 637,321 | | | 637,706 | |
| 19,815,796 | | | 20,004,164 | |
| | | |
Content assets, net | $ | 32,349,184 | | | $ | 32,736,713 | |
| | | |
|
| | | | | | | |
| 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 March 31, 2023, approximately $5,430 million, $2,781 million, and $1,952 million of the $12,533 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 March 31, 2023, approximately $3,553 million, $2,393 million, and therefore not included in produced content. Of$1,692 million of the $9,306 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 March 31, 2023, the amount of accrued participations and residuals iswas not material.
The following table represents the amortization of content assets:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (in thousands) |
Licensed content | $ | 1,723,678 | | | $ | 1,884,438 | |
Produced content | 1,736,306 | | | 1,281,927 | |
Total | $ | 3,459,984 | | | $ | 3,166,365 | |
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | As of | | |
| | March 31, 2023 | | December 31, 2022 | | Estimated Useful Lives |
| | (in thousands) | | |
Land | | $ | 86,452 | | | $ | 85,005 | | | |
Buildings | | 60,420 | | | 52,106 | | | 30 years |
Leasehold improvements | | 1,050,836 | | | 1,040,570 | | | Over life of lease |
Furniture and fixtures | | 153,836 | | | 153,682 | | | 3 years |
Information technology | | 443,073 | | | 442,681 | | | 3 years |
Corporate aircraft | | 115,578 | | | 115,578 | | | 8-10 years |
Machinery and equipment | | 27,068 | | | 26,821 | | | 3-5 years |
Capital work-in-progress | | 284,181 | | | 235,555 | | | |
Property and equipment, gross | | 2,221,444 | | | 2,151,998 | | | |
Less: Accumulated depreciation | | (808,350) | | | (753,741) | | | |
Property and equipment, net | | $ | 1,413,094 | | | $ | 1,398,257 | | | |
Leases
The Company has entered into operating leases primarily for real estate. 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.
Information related to the Company's operating right-of-use assets and related operating lease liabilities were as follows:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (in thousands) |
Cash paid for operating lease liabilities | $ | 113,407 | | | $ | 103,141 | |
Right-of-use assets obtained in exchange for new operating lease obligations | 20,894 | | | 141,298 | |
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
Operating lease right-of-use assets, net | $ | 2,175,020 | | | $ | 2,227,122 | |
| | | |
Current operating lease liabilities | 363,304 | | | 355,985 | |
Non-current operating lease liabilities | 2,155,415 | | | 2,222,503 | |
Total operating lease liabilities | $ | 2,518,719 | | | $ | 2,578,488 | |
|
| | | | | | | | | | |
| | 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 |
| | |
Other Current Assets
Other current assets consisted of the following:
| | | | | | | | | | | | | | |
| | As of |
| | March 31, 2023 | | December 31, 2022 |
| | (in thousands) |
Trade receivables | | $ | 1,025,509 | | | $ | 988,898 | |
Prepaid expenses | | 485,997 | | | 392,735 | |
Other | | 1,143,613 | | | 1,826,388 | |
Total other current assets | | $ | 2,655,119 | | | $ | 3,208,021 | |
The decrease in capital work-in-progress from December 31, 2016 isOther was primarily driven by receipt of amounts due to leasehold improvements for 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.under a modified content licensing arrangement.
5. Long-term6. Debt
As of September 30, 2017,March 31, 2023, the Company had aggregate outstanding long-term debtnotes of $4,888.8$14,437 million, net of $46.8$76 million of issuance costs, with varying maturities (the "Notes"). Of the outstanding balance, $399 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of December 31, 2022, the Company had aggregate outstanding notes of $14,353 million, net of $79 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 $81 million for the three months ended March 31, 2023).
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, 2017March 31, 2023 and December 31, 2016:2022:
| | | | | | | | | | | | | | | | Principal Amount at Par | | Level 2 Fair Value as of |
| | | Level 2 Fair Value as of | | March 31, 2023 | | December 31, 2022 | | Issuance Date | | Maturity | | March 31, 2023 | | December 31, 2022 |
| Principal Amount at Par | | Issuance Date | | Maturity | | Interest Payment Dates | | September 30, 2017 | | December 31, 2016 | | (in millions) | | | | | | (in millions) |
5.750% Senior Notes | | 5.750% Senior Notes | | $ | 400 | | | $ | 400 | | | February 2014 | | March 2024 | | $ | 404 | | | $ | 404 | |
5.875% Senior Notes | | 5.875% Senior Notes | | 800 | | | 800 | | | February 2015 | | February 2025 | | 817 | | | 811 | |
3.000% Senior Notes (1) | | 3.000% Senior Notes (1) | | 510 | | | 503 | | | April 2020 | | June 2025 | | 503 | | | 495 | |
3.625% Senior Notes | | 3.625% Senior Notes | | 500 | | | 500 | | | April 2020 | | June 2025 | | 487 | | | 479 | |
4.375% Senior Notes | | 4.375% Senior Notes | | 1,000 | | | 1,000 | | | October 2016 | | November 2026 | | 991 | | | 980 | |
3.625% Senior Notes (1) | | 3.625% Senior Notes (1) | | 1,412 | | | 1,391 | | | May 2017 | | May 2027 | | 1,403 | | | 1,338 | |
4.875% Senior Notes | | 4.875% Senior Notes | | 1,600 | | | 1,600 | | | October 2017 | | April 2028 | | 1,610 | | | 1,557 | |
5.875% Senior Notes | | 5.875% Senior Notes | | 1,900 | | | 1,900 | | | April 2018 | | November 2028 | | 2,002 | | | 1,930 | |
4.625% Senior Notes (1) | | 4.625% Senior Notes (1) | | 1,194 | | | 1,177 | | | October 2018 | | May 2029 | | 1,222 | | | 1,151 | |
6.375% Senior Notes | | 6.375% Senior Notes | | 800 | | | 800 | | | October 2018 | | May 2029 | | 862 | | | 830 | |
3.875% Senior Notes (1) | | 3.875% Senior Notes (1) | | 1,303 | | | 1,284 | | | April 2019 | | November 2029 | | 1,283 | | | 1,201 | |
5.375% Senior Notes | | 5.375% Senior Notes | | 900 | | | 900 | | | April 2019 | | November 2029 | | 917 | | | 885 | |
3.625% Senior Notes (1) | | 3.625% Senior Notes (1) | | 1,194 | | | 1,177 | | | October 2019 | | June 2030 | | 1,153 | | | 1,078 | |
4.875% Senior Notes | | 4.875% Senior Notes | | 1,000 | | | 1,000 | | | October 2019 | | June 2030 | | 998 | | | 944 | |
| (in millions) | | (in millions) | | $ | 14,513 | | | $ | 14,432 | | | $ | 14,652 | | | $ | 14,083 | |
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 million and $115.1 million3.625% Senior Notes for the three and nine months ending September 30, 2017, respectively.€1,100 million.
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, 2017March 31, 2023 and December 31, 2016,2022, the Company was in compliance with all related covenants.
Revolving Credit Facility
In July 2017,On March 6, 2023, the Company entered into a $500.0 millionamended its $1 billion unsecured revolving credit facility (“("Revolving Credit Agreement”Agreement"), with an uncommitted incremental facility to increasereplace the amount ofLondon interbank offered rate to a variable secured overnight financing rate (the “Term SOFR Rate”) as the revolving credit facility by uprate to an additional $250.0 million, subject to certain terms and conditions.which interest payments are indexed, among other things. The Revolving Credit Agreement matures on June 17, 2026. Revolving loans may be borrowed, repaid and reborrowed until July 27, 2022,June 17, 2026, 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,March 31, 2023, 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”)the Term SOFR Rate (or the applicable benchmark replacement), 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 LIBOTerm SOFR Rate for a one-month interest period,tenor, plus 1.00%. The Adjusted LIBOTerm SOFR Rate is defined as the London interbank offeredforward-looking secured overnight financing rate for deposits in U.S. dollars,administered by the Federal Reserve Bank of New York or a successor administrator, for the relevant interest period, adjusted for statutory reserve requirements, but in no event shall the Adjusted LIBOTerm SOFR Rate be less than 0.00% per annum.
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,March 31, 2023 and December 31, 2022, the Company was in compliance with all related covenants.
6.
7. Commitments and Contingencies
Streaming Content
As of September 30, 2017,March 31, 2023, the Company had $17.0$21.5 billion of obligations comprised of $4.1$4.3 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$14.3 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, 2016,2022, the Company had $14.5$21.8 billion of obligations comprised of $3.6$4.5 billion included in "Current content liabilities" and $2.9$3.1 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $8.0$14.2 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 |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
Less than one year | $ | 9,771,665 | | | $ | 10,038,483 | |
Due after one year and through three years | 9,536,111 | | | 9,425,551 | |
Due after three years and through five years | 1,964,812 | | | 2,124,307 | |
Due after five years | 253,283 | | | 243,606 | |
Total content obligations | $ | 21,525,871 | | | $ | 21,831,947 | |
|
| | | | | | | |
| 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. No amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.
7.8. Stockholders’ Equity
Stock Option Plan
In June 2011,2020, the CompanyCompany's stockholders approved the 2020 Stock Plan, which was adopted by the 2011 Stock Plan.Company’s Board of Directors in March 2020 subject to stockholder approval. 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. As
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) | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Balances as of December 31, 2022 | 16,454,103 | | | 19,896,861 | | | $ | 242.22 | | | | | |
Granted | (591,343) | | | 591,343 | | | 317.39 | | | | |
Exercised | — | | | (412,158) | | | 62.29 | | | | | |
Expired | — | | | (574) | | | 13.14 | | | | | |
Balances as of March 31, 2023 | 15,862,760 | | | 20,075,472 | | | $ | 248.14 | | | 5.58 | | $ | 2,545,760 | |
Vested and expected to vest as of March 31, 2023 | | | 20,075,472 | | | $ | 248.14 | | | 5.58 | | $ | 2,545,760 | |
Exercisable as of March 31, 2023 | | | 20,014,050 | | | $ | 247.85 | | | 5.56 | | $ | 2,544,913 | |
|
| | | | | | | | | | | | | | | |
| | | 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 in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the thirdfirst quarter of 20172023 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 thirdfirst quarter of 2017.2023. This amount changes based on the fair market value of the Company’s common stock.
A summary of the amounts related to option exercises, is as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | March 31, 2023 | | March 31, 2022 | |
| (in thousands) | | (in thousands) |
Total intrinsic value of options exercised | $ | 142,664 |
| | $ | 35,443 |
| | $ | 351,488 |
| | $ | 104,168 |
| Total intrinsic value of options exercised | $ | 116,310 | | | $ | 114,762 | | |
Cash received from options exercised | 34,669 |
| | 3,819 |
| | 73,673 |
| | 11,587 |
| Cash received from options exercised | 26,028 | | | 13,678 | | |
Stock-based Compensation
Stock options granted are generally vested in full upon grant date and exercisable for the full ten year contractual term regardless of employment status. Stock options granted to certain named executive officers vest on the one-year anniversary of the grant date, subject to the employee’s continuous employment or service with the Company through the vesting date. The following table summarizes the assumptions used to value option grants using the lattice-binomial model and the valuation data:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Dividend yield | — | % | | — | % | | | | |
Expected volatility | 46 | % | | 38 | % | | | | |
Risk-free interest rate | 3.63 | % | | 1.71 | % | | | | |
Suboptimal exercise factor | 4.22 | | | 4.71 | | | | | |
Weighted-average fair value (per share) | $ | 186 | | | $ | 228 | | | | | |
Total stock-based compensation expense (in thousands) | $ | 99,099 | | | $ | 119,209 | | | | | |
Total income tax impact on provision (in thousands) | $ | 21,711 | | | $ | 26,413 | | | | | |
Stock Repurchases
|
| | | | | | | | | | | | | | | |
| 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 determiningIn March 2021, the suboptimal exercise factor, includingCompany’s Board of Directors authorized the historical and estimated option exercise behavior.
The Company calculates expected volatility based solely on implied volatility. The Company believes that implied volatilityrepurchase of publicly traded options inup to $5 billion of its common stock, with no expiration date. Stock repurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or other similar purchase techniques and in such amounts as management deems appropriate. The Company is more reflectivenot obligated to repurchase any specific number of shares, and the timing and actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, general economic, business and market conditions, and given consistently high trade volumesalternative investment
opportunities. The Company may discontinue any repurchases of its common stock.
In valuing shares issued understock at any time without prior notice. During the Company’s employee stock option plans,three months ended March 31, 2023, the Company basesrepurchased 1,222,056 shares for an aggregate amount of $400 million. As of March 31, 2023, $4.0 billion remain available for repurchases. Shares repurchased by the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similarCompany are accounted for when the transaction is settled. As of March 31, 2023, there were no unsettled share repurchases. Direct costs incurred to acquire the contractual termshares are included in the total cost of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.shares.
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
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| | (in thousands, except percentages) |
Provision for income taxes | | $ | 163,754 | | | $ | 382,245 | | | | | |
Effective tax rate | | 11 | % | | 19 | % | | | | |
The effective tax rates for the three months ended September 30, 2017 and 2016 were (11)% and 35%, respectively. 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 three and nine months ended September 30, 2017March 31, 2023 differed from the Federal statutory rate primarily due to the impact of international provisions of the Tax Cuts and Jobs Act, research and development credits, and 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, partially offset by state taxes, foreign taxes, and non-deductible expenses.stock-based compensation. The effective tax rates for the three and nine months ended September 30, 2016March 31, 2022 differed from the Federal statutory rate primarily due to Federal and California R&D credits partiallyan increase in foreign taxes, offset by state taxes, foreign taxesthe impact of international provisions of the Tax Cuts and non-deductible expenses. Jobs Act and the recognition of excess tax benefits of stock-based compensation.
The decrease in the effective tax rate for the three and nine months ended September 30, 2017March 31, 2023, as compared to the same period in 20162022 was primarily due primarilyto a decrease in foreign taxes. For the three months ended March 31, 2023, the Company recognized a discrete tax benefit related to the recognition of excess tax benefits attributablefrom stock-based compensation of $24 million, compared to the adoptionthree months ended March 31, 2022 of ASU 2016-09 and an increase in foreign income taxed at rates lower than the US statutory rate.$25 million.
Gross unrecognized tax benefits were $37.2$234 million and $19.7$227 million as of September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $33.3$162 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of September 30, 2017, gross unrecognized tax benefits of $15.8 million was classified as “Other non-current liabilities” and $21.4 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 million and $227.2 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, 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, the Company has a valuation allowance of $33.1 million primarily due to foreign tax credit carryovers. As of 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 benefit related to the excess tax benefits from stock-based compensation of $41.7 million and $110.5 million, respectively.
The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for 2014the years 2016 through 2018 and 2015.is subject to examination for 2019 through 2022. The 2008 through 2015foreign and state tax returns for the years 2015 through 2022 are subject to examination by various states and foreign jurisdictions. While the Company is in various stages of inquiries and examinations by federal, state and foreign taxing authorities, we believe that our tax authorities. The Company has no significant foreign jurisdiction audits underway. The years 2011 through 2016 remain subjectpositions will more likely than not be sustained. Nonetheless, it is possible that future obligations related to examination by foreign tax authorities. these matters could arise.
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,However, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.made at this time.
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 one 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
Total U.S. revenues were $3.3 billion and contribution profit (loss)$3.1 billion for each of the reportable segments. Contribution profit (loss) is defined as revenues less cost of revenuesthree months ended March 31, 2023 and marketing expenses incurred2022, respectively. See Note 2 Revenue Recognition for additional information about streaming revenue by the segment. The Company has aggregated the results of the International operating segments into one reportable segment because these operating segments share similar long-term economic 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. Revenues and the related payment card fees are attributed to the 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 with the Company's global expansion, content acquired, licensed, 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.region.
The Company's long-lived tangible assets, as well as the Company's operating lease right-of-use assets recognized on the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, were located as follows:
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
United States | $ | 2,721,743 | | | $ | 2,745,071 | |
International | 866,371 | | | 880,308 | |
|
| | | | | | | |
| 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 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 information 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 |
|
The following table represents the amortization of content assets:
|
| | | | | | | | | | | | | | | |
| 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 |
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; our ability to improve our content offerings and service; our future financial performance, including expectations regarding revenues, deferred revenue, operating income and margin, net income, expenses, and profitability; liquidity, including the sufficiency of our capital resources, net cash provided by (used in) operating activities, access to financing sources, and free cash flows; capital allocation strategies, including any stock repurchases or repurchase programs; seasonality; stock price volatility; impact of and the Company’s response to, new accounting standards; content amortization; pricing changes; dividends; impact of foreign currency and exchange rate fluctuations, including on net income, revenues and average revenues per paying member; investments in global streaming, including original content; impact of contentinterest rate fluctuations; adequacy of existing facilities; future regulatory changes and their impact on membership growth; cash use in connection with the acquisition, licensingour business; intellectual property; price changes and productiontesting; impact of content; liquidity and free cash flow; unrecognized tax benefits; deferred tax assets; effective tax rate; accessing and obtaining additional capital, including future debt financing;recently adopted accounting pronouncements; accounting treatment for changes related to content assets; acquisitions; membership growth, including impact of content and pricing changes on membership growth; partnerships; member viewing patterns; dividends; future contractual obligations, including unknown streaming content obligations and timing of payments.payments; our global content and marketing investments, including investments in original programming; content amortization; resolution of tax examinations; tax expense; unrecognized tax benefits; deferred tax assets; and our ability to effectively manage change and growth. 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, 20162022 filed with the Securities and Exchange Commission (“SEC”) on January 27, 2017,26, 2023, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA.1A.
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 (ir.netflix.net), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media and blogs 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 and blogs 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 and blogs listed on our investor relations Web site.website.
Overview
We are one of the world’s leading internet television networkentertainment services with over 109232 million streaming memberspaid memberships in over 190 countries enjoying more than 125 million hoursTV series, films and games across a wide variety of TV showsgenres and movies per day, including original series, documentaries and feature films.languages. Members can watchplay, pause and resume watching as much as they want, anytime, anywhere, on nearlyand can change their plans at any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the U.S., our members can receive DVDs delivered quickly to their homes.
We are a pioneer in the internet delivery of TV shows and movies, 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 movies 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.time.
Our core strategy is to grow our streaming membership business globally within the parameters of our profitoperating margin targets.target. We arestrive to continuously improvingimprove our members'members’ experience by expanding our streaming content with a focus on a programming mix ofoffering compelling content that delights them and attracts new members. We seek to drive conversation around our members. In addition,content to further enhance member joy, and we are perpetuallycontinuously enhancing our user interface to help our members more easily choose content that they will find enjoyable.
Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet-connected screens and extendingwhen they tend to increase their viewing. Historically, the fourth quarter represents our greatest streaming servicemembership growth. In addition, our membership growth can be impacted by our content release schedule and changes to more internet-connected screens. Our members can also download a selectionpricing.
Results of Operations
The following represents our consolidated performance highlights:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of/ Three Months Ended | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except revenue per membership and percentages) |
Financial Results: | | | | | | | |
Streaming revenues | $ | 8,130,001 | | | $ | 7,827,957 | | | $ | 302,044 | | | 4 | % |
DVD revenues (1) | 31,502 | | | 39,810 | | | (8,308) | | | (21) | % |
Total revenues | $ | 8,161,503 | | | $ | 7,867,767 | | | $ | 293,736 | | | 4 | % |
| | | | | | | |
Operating income | $ | 1,714,317 | | | $ | 1,971,626 | | | $ | (257,309) | | | (13) | % |
Operating margin | 21 | % | | 25 | % | | (4) | % | | |
| | | | | | | |
Global Streaming Memberships: | | | | | | | |
Paid net membership additions (losses) | 1,751 | | | (203) | | | 1,954 | | | 963 | % |
Paid memberships at end of period | 232,498 | | | 221,641 | | | 10,857 | | | 5 | % |
Average paying memberships | 231,623 | | | 221,743 | | | 9,880 | | | 4 | % |
Average monthly revenue per paying membership | $ | 11.70 | | | $ | 11.77 | | | $ | (0.07) | | | (1) | % |
|
| | | | | | | | | | | | | | |
| 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 | % |
(1) In April 2023, we announced our plans to discontinue our DVD-by-mail service, which we do not expect to have a material effect on our operations or financial results.
Consolidated revenues for the three months ended September 30, 2017March 31, 2023 increased $694.7 million4% as compared to the three months ended September 30, 2016March 31, 2022. The increase in our consolidated revenues was due to the 4% growth in the average number of paid streamingpaying memberships, globally, the majority of which was growthpartially offset by a 1% decrease in our international memberships. In addition, the average monthly revenue per paying streamingmembership. The decrease in average monthly revenue per paying membership increasedwas primarily due to the strengthening of the U.S. dollar relative to certain foreign currencies and changes in plan mix, partially offset by our price changes and plan mix. The increasechanges.
Operating expenses grew at a faster rate than revenue, which was unfavorably impacted by fluctuations in foreign exchange rates, resulting in a decrease in operating income for the three months ended September 30, 2017margin as compared to the same period in 2016 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, as well as increased headcount costs to support continued improvements in our streaming 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 quarter of 2017, partially offset by an increase in interest expense primarily due to the higher principal of notes outstanding and an increase in foreign exchange losses primarily due to the remeasurement of our euro denominated senior notes.prior comparative period.
Streaming Revenues
We primarily 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 March 31, 2023, 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 membershippaid plans are structured similarly to the U.S. and range in priceranged from the U.S. dollar equivalent of approximately $5.00$1 to $26 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 elements to our segment resultsthree months ended March 31, 2023 and 2022.
We define contribution profit (loss) as revenues less costUnited States and Canada (UCAN)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 3,608,645 | | | $ | 3,350,424 | | | $ | 258,221 | | | 8 | % |
Paid net membership additions (losses) | | 102 | | | (636) | | | 738 | | | 116 | % |
Paid memberships at end of period | | 74,398 | | | 74,579 | | | (181) | | | — | % |
Average paying memberships | | 74,347 | | | 74,897 | | | (550) | | | (1) | % |
Average monthly revenue per paying membership | | $ | 16.18 | | | $ | 14.91 | | | $ | 1.27 | | | 9 | % |
Constant currency change (1) | | | | | | | | 9 | % |
| | | | | | | | |
| | | | | | | | |
Europe, Middle East, and Africa (EMEA)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 2,517,641 | | | $ | 2,561,831 | | | $ | (44,190) | | | (2) | % |
Paid net membership additions (losses) | | 644 | | | (303) | | | 947 | | | 313 | % |
Paid memberships at end of period | | 77,373 | | | 73,733 | | | 3,640 | | | 5 | % |
Average paying memberships | | 77,051 | | | 73,885 | | | 3,166 | | | 4 | % |
Average monthly revenue per paying membership | | $ | 10.89 | | | $ | 11.56 | | | $ | (0.67) | | | (6) | % |
Constant currency change (1) | | | | | | | | 1 | % |
| | | | | | | | |
| | | | | | | | |
Latin America (LATAM)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 1,070,192 | | | $ | 998,948 | | | $ | 71,244 | | | 7 | % |
Paid net membership additions (losses) | | (450) | | | (351) | | | (99) | | | (28) | % |
Paid memberships at end of period | | 41,249 | | | 39,610 | | | 1,639 | | | 4 | % |
Average paying memberships | | 41,474 | | | 39,786 | | | 1,688 | | | 4 | % |
Average monthly revenue per paying membership | | $ | 8.60 | | | $ | 8.37 | | | $ | 0.23 | | | 3 | % |
Constant currency change (1) | | | | | | | | 8 | % |
| | | | | | | | |
| | | | | | | | |
Asia-Pacific (APAC)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of/ Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except revenue per membership and percentages) |
Revenues | | $ | 933,523 | | | $ | 916,754 | | | $ | 16,769 | | | 2 | % |
Paid net membership additions (losses) | | 1,455 | | | 1,087 | | | 368 | | | 34 | % |
Paid memberships at end of period | | 39,478 | | | 33,719 | | | 5,759 | | | 17 | % |
Average paying memberships | | 38,751 | | | 33,176 | | | 5,575 | | | 17 | % |
Average monthly revenue per paying membership | | $ | 8.03 | | | $ | 9.21 | | | $ | (1.18) | | | (13) | % |
Constant currency change (1) | | | | | | | | (6) | % |
| | | | | | | | |
| | | | | | | | |
(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 Domestic and International streaming segments, content expenses, which includethree months ended March 31, 2023, our revenues would have been approximately $346 million higher had foreign currency exchange rates remained constant with those for the amortizationthree months ended March 31, 2022.
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 | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except percentages) |
Cost of revenues | $ | 4,803,625 | | $ | 4,284,705 | | $ | 518,920 | | 12 | % |
As a percentage of revenues | 59 | % | | 54 | % | | | | |
The increase in cost of revenues was primarily due to a $294 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Other costs of revenues increased $225 million, primarily due to an increase in other content expenses in the Domestic DVD segment consist primarily of delivery expenses, content expenses, including amortization of DVD content assets and revenue sharing expenses, and other expenses associated with our DVD processing and customer service centers. Delivery expenses forthree months ended March 31, 2023 as compared to 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.three months ended March 31, 2022.
For the Domestic and International streaming segments, marketing
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing and advertising sales 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except percentages) |
Marketing | $ | 555,362 | | $ | 555,978 | | $ | (616) | | — | % |
As a percentage of revenues | 7 | % | | 7 | % | | | | |
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
Threethree months ended September 30, 2017March 31, 2023 as compared to the three months ended September 30, 2016March 31, 2022 remained relatively flat.
|
| | | | | | | | | | | | | | | |
| | 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 | % | | | | |
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 increase in domestic streaming cost of revenues was primarily due to a $136.5 million increase in content 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 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, 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 | | 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 | % | | | | |
The increase 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 revenues was primarily due to a $331.5 million increase in content 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.
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 driven by our growing member base.
International marketing expenses increased mainly due to increased advertising and public relations as well as increased payments to our 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 Expenses
Technology and Development
Technology and development expenses consist primarily of payroll and related costs incurred inexpenses for technology personnel responsible for making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendation,recommendations, merchandising and streaming delivery technology and infrastructure. Technology and development expenses also include costs associated with general use computer hardware and software.
Three months ended September 30, 2017 as compared to the three months ended September 30, 2016 | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except percentages) |
Technology and development | $ | 687,275 | | $ | 657,530 | | $ | 29,745 | | 5 | % |
As a percentage of revenues | 8 | % | | 8 | % | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| (in thousands, except percentages) |
Technology and development | $ | 255,236 |
| | $ | 216,099 |
| | $ | 39,137 |
| | 18 | % |
As a percentage of revenues | 9 | % | | 9 | % | | | | |
The increase in technology and development expenses was primarily due to a $22.9$26 million increase in personnel-related costs, including stock-based compensation expense, resulting from an increase in compensation for existing employees and a 2% 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 $8.7 million.costs.
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 primarily 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, 2017 as compared to the three months ended September 30, 2016 | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except percentages) |
General and administrative | $ | 400,924 | | $ | 397,928 | | $ | 2,996 | | 1 | % |
As a percentage of revenues | 5 | % | | 5 | % | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| (in thousands, except percentages) |
General and administrative | $ | 215,526 |
| | $ | 153,166 |
| | $ | 62,360 |
| | 41 | % |
As a percentage of revenues | 7 | % | | 7 | % | | | | |
General and administrative expenses increased primarily due to a $37.6 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 increase in compensation for existing employees. In addition, facilities-related costs increased $8.2 million, primarily driven by costs for our expanded Los Gatos, California headquarters and new Los Angeles, California facility, both of which were placed into operation in the first quarter of 2017. In addition, third party expenses increased $14.1 million.
Ninethree months ended September 30, 2017March 31, 2023 as compared to the ninethree months ended September 30, 2016March 31, 2022 remained relatively flat.
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
| September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 |
| (in thousands, except percentages) |
General and administrative | $ | 623,760 |
| | $ | 418,798 |
| | $ | 204,962 |
| | 49 | % |
As a percentage of revenues | 7 | % | | 7 | % | | | | |
General and administrative expenses increased primarily due to a $135.0 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 increase in compensation for existing employees. In addition, facilities-related costs increased $36.2 million, primarily driven by costs for our expanded Los Gatos, California headquarters and new Los Angeles, California facility, both of which were placed into operation in the first quarter of 2017. In addition, third party expenses increased $31.0 million.
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, 2017 as compared to the three months ended September 30, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except percentages) |
Interest expense | | $ | 174,239 | | $ | 187,579 | | $ | (13,340) | | (7) | % |
As a percentage of revenues | | 2 | % | | 2 | % | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| | (in thousands, except percentages) |
Interest expense | | $ | (60,688 | ) | | $ | (35,536 | ) | | $ | (25,152 | ) | | (71 | )% |
As a percentage of revenues | | (2 | )% | | (2 | )% | | | | |
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) |
Interest expense | | $ | (162,912 | ) | | $ | (106,528 | ) | | $ | (56,384 | ) | | (53 | )% |
As a percentage of revenues | | (2 | )% | | (2 | )% | | | | |
Interest expense primarily consistedconsists of interest on our Notes of $58.4 million and $156.5$174 million for the three and nine months ended September 30, 2017.March 31, 2023. The increasedecrease in interest expense for the three and nine months ended September 30, 2017March 31, 2023 as compared to the three and nine months ended September 30, 2016March 31, 2022 was primarily due to the higherlower average aggregate principal of interest bearing notes outstanding.
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, cash equivalents and short-term investments.
Three months ended September 30, 2017 as compared to the three months ended September 30, 2016
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | Q3'17 vs. Q3'16 |
| | (in thousands, except percentages) |
Interest and other income (expense) | | $ | (31,702 | ) | | $ | 8,627 |
| | $ | (40,329 | ) | | (467 | )% |
As a percentage of revenues | | (1 | )% | | — | % | | | | |
Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
| | | | Nine Months Ended | | Change | | | Three Months Ended | | Change |
| | September 30, 2017 | | September 30, 2016 | | YTD'17 vs. YTD'16 | | | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except percentages) | | | (in thousands, except percentages) |
Interest and other income (expense) | | $ | (76,473 | ) | | $ | 50,907 |
| | $ | (127,380 | ) | | (250 | )% | Interest and other income (expense) | | $ | (71,204) | | $ | 195,645 | | $ | (266,849) | | (136) | % |
As a percentage of revenues | | (1 | )% | | 1 | % | | | | | As a percentage of revenues | | (1) | % | | 2 | % | |
Interest and other income (expense) decreased forin the three and nine months ended September 30, 2017,March 31, 2023 primarily due to foreign exchange losses of $35.3$107 million, and $84.7 million, respectively, compared to gains of $6.4$192 million and $44.6 million, respectively, for the corresponding periodsperiod in 2016.2022. In the three and nine months ended September 30, 2017,March 31, 2023, the foreign exchange losses were primarily driven by the $50.8non-cash loss of $81 million and $115.1 million, respectively, loss from the remeasurement of our €1,300.0€5,170 million Senior Notes, partially offset bycoupled with the remeasurement of cash and content liability positions in currencies other than the functional currenciescurrencies. In the three months ended March 31, 2022, the foreign exchange gains were primarily driven by the $162 million non-cash gain from the remeasurement of our European€5,170 million Senior Notes, coupled with the remeasurement of cash and U.S. entities.content liability positions in currencies other than the functional currencies. The change in foreign currency gains and losses was partially offset by higher interest income earned in the three months ended March 31, 2023 as compared to the corresponding period in 2022.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change |
| | March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| | (in thousands, except percentages) |
Provision for income taxes | | $ | 163,754 | | | $ | 382,245 | | | $ | (218,491) | | (57) | % |
Effective tax rate | | 11 | % | | 19 | % | | | |
The effective tax rates for the three months ended September 30, 2017 and 2016 were (11)% and 35%, respectively. The effective tax rate for the three months ended September 30, 2017March 31, 2023 differed from the Federal statutory rate primarily due to the impact of international provisions of the Tax Cuts and Jobs Act, research and development credits, and the recognition of excess tax benefits attributable toof stock-based compensation.
The decrease in the adoption of ASU 2016-09 and Federal and California research and development ("R&D") credits partially offset by state taxes, foreign taxes, and non-deductible expenses. The effective tax rate for the three months ended September 30, 2016, differed from 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. The decrease in our effective tax rate for the three months ended September 30, 2017,March 31, 2023, as compared to the same period in 20162022 was due primarily to the recognition 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.
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 to the adoption of ASU 2016-09 and Federal and California R&D credits, partially offset by state taxes, foreign taxes and non-deductible expenses. The effective tax rate for 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. Thea 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 recognition 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.taxes.
Liquidity and Capital Resources
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | Change |
| March 31, 2023 | | December 31, 2022 | | March 31, 2023 vs. December 31, 2022 |
| (in thousands, except percentages) |
Cash, cash equivalents, restricted cash and short-term investments | $ | 7,850,929 | | | $ | 6,081,858 | | | $ | 1,769,071 | | | 29 | % |
Short-term and long-term debt | 14,437,128 | | | 14,353,076 | | | 84,052 | | | 1 | % |
Cash, and cash equivalents, was $1,746.5 million as of September 30, 2017, which increased $12.7 million as compared torestricted cash cash equivalents and short-term investments of $1,733.8increased $1,769 million as of December 31, 2016. The increase in the ninethree months ended September 30, 2017 wasMarch 31, 2023 primarily due to cash provided by operations, primarily offset by the repurchase of stock.
Debt, net of debt issuance costs, increased $84 million primarily due to the proceeds from the issuanceremeasurement of debt partially offset by cash usedour euro-denominated notes. The amount of principal and interest on our outstanding notes due in operations.
Our primary uses of cash include the acquisition, licensing and production of content, streaming delivery, marketing programs and personnel-related costs. Investments 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 $685 million. As of September 30, 2017,March 31, 2023, no amounts had been borrowed under the $1 billion Revolving Credit Agreement. See Note 56 Debt in the accompanying notes to theour consolidated financial statements for additional information.statements.
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. We anticipate financingthat our future capital needs infrom the debt market as our after-tax cost of debt is lower than our cost of equity.will be more limited compared to prior years. Our ability to obtain this or any additional financing that we may choose to, or need, to, obtainincluding for potential strategic acquisitions and investments, 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.
AsIn March 2021, our Board of September 30, 2017, cash and cash equivalents held by our foreign subsidiaries amountedDirectors authorized the repurchase of up to $443.7 million. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. income taxes and foreign withholding taxes on the portion associated with undistributed earnings for certain foreign subsidiaries.
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. 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 (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, non-cash stock-based compensation expense and other working capital differences. The excess content payments over expense is variable based on the payment terms$5 billion of our content agreementscommon stock, with no expiration date. Stock repurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or other similar purchase techniques and is expectedin such amounts as management deems appropriate. We are not obligated to increase as we enter into more agreements with upfront cash payments, such as licensingrepurchase any specific number of shares, and productionthe timing and actual number of original content. Working capital differences include deferred revenue, taxesshares repurchased will depend on a variety of factors, including our stock price, general economic, business and semi-annual interest payments onmarket conditions, and alternative investment opportunities. We may discontinue any repurchases of our outstanding debt. Our receivables from members generally settle quickly and deferred revenue is a source of cash flow.
Three months ended September 30, 2017 as compared to the three months ended September 30, 2016
|
| | | | | | | |
| 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 | ) |
Cash used in operating activities decreased $42.3 million to $419.6 million forcommon stock at any time without prior notice. For the three months ended September 30, 2017, compared to the same period of 2016. The decreased use of cash was due primarily to a $694.7 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%. In addition, we had increased payments associated with higher operating expenses.
Cash provided by investing activities increased $178.2 million, primarily due to a $179.0 million increase in the proceeds from the sale of short-term investments. In July 2017,March 31, 2023, 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 issuancerepurchased 1,222,056 shares of common stock partially offset by a decrease in excess tax benefits from stock-based compensation due to the adoptionfor an aggregate amount of ASU 2016-09 in the first quarter$400 million. As of 2017.March 31, 2023, $4.0 billion remains available for repurchases.
Free cash flow was $594.5 million lower than net income for the three months ended September 30, 2017 primarily due to $722.1 millionOur primary uses of cash payments for streaming content assets over streaming amortization expense partially offset by $44.8 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.
Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
|
| | | | | | | |
| 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 | ) |
Cash used in operating activities increased $381.2 million to $1,298.0 million for the nine months ended September 30, 2017, 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 streaming content assets increased $1,605.2 million or 33%. In addition, we had increased payments associated with higher operating expenses. The increased use of cash was partially offset by a $2,053.8 million or 32% increase in revenues.
Cash provided by investing activities increased $44.8 million, primarily due to an 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.
Cash provided by financing activities increased $1,429.9 million in the nine months ended September 30, 2017, due to the proceeds from the issuance of debt of $1,405.2 million, net of $15.3 million of issuance costs.
Free cash flow was $1,869.3 million lower than net income for the nine months ended September 30, 2017 primarily due to $1,997.6 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 million of non-cash stock-based compensation expenses.
Free cash flow was $1,141.1 million lower than net income for the nine months ended September 30, 2016, primarily due to $1,418.3 million of cash payments for streaming content assets over streaming amortization expense partially offset by $130.0 million of non-cash stock-based compensation expense and $147.2 million favorable other working capital differences.
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. 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:
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| | | | | | | | | | | | | | | | | | | |
| Payments due by Period |
Contractual obligations (in thousands): | 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 |
|
Debt (2) | 6,708,200 |
| | 237,108 |
| | 469,578 |
| | 1,622,849 |
| | 4,378,665 |
|
Lease obligations (3) | 727,508 |
| | 96,224 |
| | 184,905 |
| | 157,762 |
| | 288,617 |
|
Other purchase obligations (4) | 642,821 |
| | 368,214 |
| | 198,418 |
| | 46,560 |
| | 29,629 |
|
Total | $ | 25,070,459 |
|
| $ | 7,685,906 |
| | $ | 8,770,910 |
| | $ | 3,745,294 |
| | $ | 4,868,349 |
|
| |
(1) | As of September 30, 2017, streaming content obligations were comprised of $4.1 billion included in "Current content liabilities" and $3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $9.6 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 content obligations include amounts related to the acquisition, licensing and production of content, marketing programs, streaming delivery and personnel-related costs, as well as for strategic acquisitions and investments. 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 upfront relative to licensed content. An obligationFor example, production costs are paid as the content is created, well in advance of when the content is available on the service and amortized. We expect to continue to significantly invest in global content, particularly in original content, which will impact our liquidity. 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 the productionnext twelve months and beyond.
Our material cash requirements from known contractual and other obligations primarily relate to our content, includes non-cancelable commitments under creative talentdebt and employment agreements. An obligation forlease obligations. As of March 31, 2023, the acquisitionexpected timing of those payments are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by Period |
Contractual obligations (in thousands): | | Total | | Next 12 Months | | Beyond 12 Months |
Content obligations (1) | | $ | 21,525,871 | | | $ | 9,771,665 | | | $ | 11,754,206 | |
Debt (2) | | 17,898,596 | | | 685,089 | | | 17,213,507 | |
Operating lease obligations (3) | | 3,309,657 | | | 472,369 | | | 2,837,288 | |
| | | | | | |
Total | | $ | 42,734,124 | | | $ | 10,929,123 | | | $ | 31,805,001 | |
(1)As of March 31, 2023, content obligations were comprised of $4.3 billion included in “Current content liabilities” and licensing$2.9 billion of “Non-current content is incurred at the time we enter into an agreement to obtain future titles. Once a title becomes available, a content liability is recordedliabilities” on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for whichSheets and $14.3 billion of obligations that are not yet determinablereflected on the Consolidated Balance Sheets as ofthey did not then meet 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. criteria for recognition.
The contractual obligations tablematerial cash requirements above doesdo 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.
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(2) | Long-term debt obligations include our Notes consisting of principal and interest payments. See Note 5 to the consolidated financial statements for further details. |
(2)Debt obligations include our Notes consisting of principal and interest payments. See Note 6 Debt to the consolidated financial statements for further details.
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(3) | Lease obligations include lease financing obligations of $16.4 million related to a portion of our current Los Gatos, California headquarters 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 operating leases. These leases have expiration dates varying through approximately 2028. |
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(4) | Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to streaming delivery, DVD content acquisition, and miscellaneous open purchase orders for which we have not received the related services or goods. |
(3)Operating lease obligations are comprised of operating lease liabilities included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Consolidated Balance Sheets, inclusive of imputed interest. Operating lease obligations also include additional obligations that are not reflected on the Consolidated Balance Sheets as they did not meet the criteria for recognition. See Note 5 Balance Sheet Components in the accompanying notes to our consolidated financial statements for further details regarding leases.
As of September 30, 2017,March 31, 2023, we had gross unrecognized tax benefits of $37.2 million which was classified in “Other non-current liabilities” and a reduction to deferred tax assets which was classified as "Other non-current assets" in the consolidated balance sheets.$234 million. 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 ArrangementsFree Cash Flow
We dodefine free cash flow as cash provided by (used in) operating activities less purchases of property and equipment and change in other assets. 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 strategic acquisitions and investments and for certain other activities like stock repurchases. Free cash flow is considered a non-GAAP financial measure and should not have transactions with unconsolidated entities, suchbe considered in isolation of, or 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,a substitute for, net income, operating income, net cash provided by operating activities, or any other obligation undermeasure 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 major recurring differences are excess content payments over amortization, non-cash stock-based compensation expense, non-cash remeasurement gain/loss on our euro-denominated debt, and other working capital differences. 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 members generally settle quickly.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
| March 31, 2023 | | March 31, 2022 | | Q1'23 vs. Q1'22 |
| (in thousands, except percentages) |
Net cash provided by operating activities | $ | 2,178,740 | | | $ | 922,839 | | | $ | 1,255,901 | | | 136 | % |
Net cash used in investing activities | (263,653) | | | (245,679) | | | 17,974 | | | 7 | % |
Net cash used in financing activities | (374,073) | | | (686,322) | | | (312,249) | | | (45) | % |
| | | | | | | |
Non-GAAP reconciliation of free cash flow: | | | | | | | |
Net cash provided by operating activities | 2,178,740 | | | 922,839 | | | 1,255,901 | | | 136 | % |
Purchases of property and equipment | (62,019) | | | (121,158) | | | (59,139) | | | (49) | % |
| | | | | | | |
Free cash flow | $ | 2,116,721 | | | $ | 801,681 | | | $ | 1,315,040 | | | 164 | % |
Net cash provided by operating activities increased $1,256 million to $2,179 million for the three months ended March 31, 2023. The increase in net cash provided by operating activities was primarily driven by a variable interestdecrease in payments for content assets, coupled with a $294 million or 4% increase in revenues. The payments for content assets decreased $1,118 million, from $3,931 million to $2,813 million, or 28%, as compared to the increase in the amortization of content assets of $294 million, from $3,166 million to $3,460 million, or 9%. The increase in net cash provided by operating activities was partially offset by increased payments associated with higher operating expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion.
Net cash used in investing activities increased $18 million for the three months ended March 31, 2023, primarily due to purchases of short-term investments, partially offset by there being no acquisitions in the three months ended March 31, 2023, as compared to acquisitions for an unconsolidated entity that providesaggregate amount of $125 million in the three months ended March 31, 2022, and a decrease in purchases of property and equipment.
Net cash used in financing liquidity, market risk, or credit risk supportactivities decreased $312 million for the three months ended March 31, 2023, primarily due to us.there being no repayment of debt in the three months ended March 31, 2023 as compared to the repayment upon maturity of the $700 million aggregate principal amount of our 5.500% Senior Notes in February 2022, partially offset by the repurchases of common stock for an aggregate amount of $400 million in the three months ended March 31, 2023.
Free cash flow was $812 million higher than net income for the three months ended March 31, 2023, primarily due to $647 million of amortization expense over cash payments for content assets, $99 million non-cash stock-based compensation expense and $81 million of non-cash remeasurement loss on our euro-denominated debt, partially offset by $15 million in other non-favorable working capital differences.
Free cash flow was $796 million lower than net income for the three months ended March 31, 2022, primarily due to $765 million of cash payments for content assets over amortization expense and $162 million of non-cash remeasurement gain on our euro-denominated debt, partially offset by $119 million of non-cash stock-based compensation expense and $12 million in other favorable working capital differences.
Indemnification
The information set forth under Note 6 7 Commitments and Contingencies 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 and related disclosures in conformity with U.S. generally accepted accounting principles generally accepted inand the United StatesCompany’s discussion and analysis of America requiresits financial condition and operating results require the Company’s management to make estimatesjudgments, assumptions and assumptionsestimates 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") 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. 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 streaming assets and the changes in related liabilities, are classified within "Net cash used in operating activities" on the Consolidated Statements of Cash Flows.
For licenses 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 “Current 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, beginning with the month of first availability. The amortization period typically ranges from six months to five years. For content where we expect more upfront viewing, due to the additional merchandising and marketing efforts, we amortize on an accelerated basis. 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, content assets, both licensed and produced are reviewed in aggregate at the operating segment level when an event or change in circumstances indicates a change in the expected usefulness or that the fair value may be less than amortized 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 event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination.
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, our estimated gross unrecognized tax benefits were $37.2 million of which $33.3 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 underreported. Note 1, to the consolidated financial statements under the caption “Basis of Presentation and Summary of Significant Accounting Policies” is incorporated herein by reference.of the Notes to consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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, 2016.2022. Our exposure to market risk has not changed significantly since December 31, 2016.2022.
Interest Rate Risk
At March 31, 2023, our cash equivalents and short-term investments were generally invested in money market funds and time deposits. Interest paid on such funds fluctuates with the prevailing interest rate.
As of March 31, 2023, we had $14.5 billion of debt, consisting of fixed rate unsecured debt in fourteen tranches due between 2024 and 2030. Refer to Note 6 Debt to the consolidated financial statements for details about all issuances. The fair value of our debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. The fair value of our debt will also fluctuate based on changes in foreign currency rates, as discussed below.
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 areCurrencies denominated in currencies other than the U.S. dollar and weaccount for 57% of revenue for the three months ended March 31, 2023. 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 Australian dollar,Mexican Peso, the Japanese yen, and the Brazilian real.Australian dollar.
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 ninethree months ended September 30, 2017, we believeMarch 31, 2023, our international revenues would have been approximately $21.0$346 million higher had foreign currency exchange rates remained consistent with those in the same period of 2016.2022.
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 ninethree months ended September 30, 2017,March 31, 2023, we recognized an $84.7a $107 million foreign exchange loss which resulted primarily fromdue to the non-cash 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 nineConsolidated Statements of Cash Flow for the three months ended September 30, 2017March 31, 2023 was $27.7an increase of $26 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.
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Item 4. | Controls and Procedures |
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)Act) 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)that such information is 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,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
The information set forth under Note 6 7 Commitments and Contingencies in the notes to the consolidated financial statements under the caption “Legal Proceedings” is incorporated herein by reference.
Item 1A.Risk Factors
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, 2016.2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Company Purchases of Equity Securities
Stock repurchases during the three months ended March 31, 2023 were as follows:
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
| | | | | | | | (in thousands) |
January 1 - 31, 2023 | | — | | | $ | — | | | — | | | $ | 4,400,000 | |
February 1 - 28, 2023 | | 454,686 | | | $ | 356.55 | | | 454,686 | | | $ | 4,237,883 | |
March 1 - 31, 2023 | | 767,370 | | | $ | 310.00 | | | 767,370 | | | $ | 4,000,000 | |
Total | | 1,222,056 | | | | | 1,222,056 | | | |
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(1) In March 2021, the Company’s Board of Directors authorized the repurchase of up to $5 billion of its common stock, with no expiration date. For further information regarding stock repurchase activity, see Note 8 Stockholders’ Equity to the consolidated financial statements in this Quarterly Report. |
(2) Average price paid per share includes costs associated with the repurchases. |
Item 6.Exhibits
(a) Exhibits:
See Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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Exhibit Number | | Exhibit Description | | Incorporated by Reference | | Filed Herewith |
| | | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | | | | | | | | | | |
| | | | 8-K | | 001-35727 | | 3.1 | | June 8, 2022 | | |
| | | | | | | | | | | | |
| | | | 8-K | | 001-35727 | | 3.2 | | February 24, 2023 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | |
101 | | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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 March 31, 2023, 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.
† Indicates a management contract or compensatory plan
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: | April 21, 2023 | By: | /s/ Ted Sarandos |
| | | Ted Sarandos Co-Chief Executive Officer (Principal executive officer) |
| | | |
Dated: | April 21, 2023 | NETFLIX, INC.By: | /s/ Greg Peters |
Dated: | October 18, 2017 | By: | /s/ REED HASTINGS |
| | | Reed Hastings
ChiefGreg Peters Co-Chief Executive Officer
(Principal executive officer)
|
| | | |
Dated: | October 18, 2017 | By: | /s/ DAVID WELLS |
| | | David Wells
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 |
| |
*Dated: | 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.April 21, 2023 | By: | /s/ Jeffrey Karbowski |
| | | Jeffrey Karbowski Chief Accounting Officer (Principal accounting officer) |