Exhibit 99.1
October 17, 2016
Fellow shareholders,
In Q3, quarterly global streaming revenue exceeded $2 billion for the first time (up 36% year over year), helped by our strong content slate including Stranger Things and the second season of Narcos. On a constant currency basis, this represents 39% year-over-year revenue growth, a 400 basis point acceleration from the last two quarters. Our summary results and forecast are below:
|
| | | | | | | | | | | | | | | | | | |
| (in millions except per share data and Streaming Content Obligations) | Q3 '15 | Q4 '15 | Q1 '16 | Q2 '16 | Q3 '16 | Q4 '16 Forecast |
| Total Streaming: | | | | | | |
| Revenue | $ | 1,581 |
| $ | 1,672 |
| $ | 1,813 |
| $ | 1,966 |
| $ | 2,158 |
| $ | 2,344 |
|
| Contribution Profit | $ | 277 |
| $ | 270 |
| $ | 309 |
| $ | 345 |
| $ | 407 |
| $ | 440 |
|
| Contribution Margin | 17.5 | % | 16.2 | % | 17.0 | % | 17.6 | % | 18.8 | % | 18.8 | % |
| Paid Memberships | 66.02 |
| 70.84 |
| 77.71 |
| 79.90 |
| 83.28 |
| 87.78 |
|
| Total Memberships | 69.17 |
| 74.76 |
| 81.50 |
| 83.18 |
| 86.74 |
| 91.94 |
|
| Net Additions | 3.62 |
| 5.59 |
| 6.74 |
| 1.68 |
| 3.57 |
| 5.20 |
|
| | | | | | | |
| US Streaming: | | | | | | |
| Revenue | $ | 1,064 |
| $ | 1,106 |
| $ | 1,161 |
| $ | 1,208 |
| $ | 1,304 |
| $ | 1,397 |
|
| Contribution Profit | $ | 344 |
| $ | 379 |
| $ | 413 |
| $ | 414 |
| $ | 475 |
| $ | 515 |
|
| Contribution Margin | 32.4 | % | 34.3 | % | 35.5 | % | 34.3 | % | 36.4 | % | 36.9 | % |
| Paid Memberships | 42.07 |
| 43.40 |
| 45.71 |
| 46.00 |
| 46.48 |
| 47.63 |
|
| Total Memberships | 43.18 |
| 44.74 |
| 46.97 |
| 47.13 |
| 47.50 |
| 48.95 |
|
| Net Additions | 0.88 |
| 1.56 |
| 2.23 |
| 0.16 |
| 0.37 |
| 1.45 |
|
| | | | | | | |
| International Streaming: | | | | | | |
| Revenue | $ | 517 |
| $ | 566 |
| $ | 652 |
| $ | 758 |
| $ | 853 |
| $ | 947 |
|
| Contribution Profit (Loss) | $ | (68 | ) | $ | (109 | ) | $ | (104 | ) | $ | (69 | ) | $ | (69 | ) | $ | (75 | ) |
| Contribution Margin | -13.1 | % | -19.2 | % | -16.0 | % | -9.1 | % | -8.0 | % | -7.9 | % |
| Paid Memberships | 23.95 |
| 27.44 |
| 31.99 |
| 33.89 |
| 36.80 |
| 40.15 |
|
| Total Memberships | 25.99 |
| 30.02 |
| 34.53 |
| 36.05 |
| 39.25 |
| 43.00 |
|
| Net Additions | 2.74 |
| 4.04 |
| 4.51 |
| 1.52 |
| 3.20 |
| 3.75 |
|
| | | | | | | |
| Total (including DVD): | | | | | | |
| Operating Income | $ | 74 |
| $ | 60 |
| $ | 49 |
| $ | 70 |
| $ | 106 |
| $ | 125 |
|
| Operating Margin | 4.2 | % | 3.3 | % | 2.5 | % | 3.3 | % | 4.6 | % | 5.1 | % |
| Net Income* | $ | 29 |
| $ | 43 |
| $ | 28 |
| $ | 41 |
| $ | 52 |
| $ | 56 |
|
| EPS* | $ | 0.07 |
| $ | 0.10 |
| $ | 0.06 |
| $ | 0.09 |
| $ | 0.12 |
| $ | 0.13 |
|
| | | | | | | |
| Net cash provided by (used in) operating activities | $ | (196 | ) | $ | (245 | ) | $ | (229 | ) | $ | (226 | ) | $ | (462 | ) | |
| Free Cash Flow | $ | (252 | ) | $ | (276 | ) | $ | (261 | ) | $ | (254 | ) | $ | (506 | ) | |
| EBITDA | $ | 123 |
| $ | 111 |
| $ | 107 |
| $ | 129 |
| $ | 164 |
| |
| Shares (FD)* | 437.6 |
| 438.3 |
| 438.0 |
| 438.2 |
| 438.4 |
| |
| Streaming Content Obligations** ($B) | 10.4 |
| 10.9 |
| 12.3 |
| 13.2 |
| 14.4 |
| |
| * Q4'15 Net income/EPS includes a $13m / $0.03 benefit from a tax accrual release related to resolution of tax audits. |
| **Corresponds to our total known streaming content obligations as defined in our financial statements and related notes in our most recently filed SEC Form 10-K. |
Q3 Results and Q4 Forecast
Global streaming revenue totaled $2.2 billion, of which 40% was generated abroad. Operating income amounted to $106 million (compared with our $64 million estimate) while net income was $52 million (vs. forecast of $22 million).
In Q3, we added 0.4 million members in the US vs. our forecast of 0.3 million and 3.2 million members internationally vs. our forecast of 2.0 million. Our over-performance against forecast (86.7m total streaming members vs. forecast of 85.5m) was driven primarily by stronger than expected acquisition due to excitement around Netflix original content.
As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy. In Q3, we under forecasted member growth, while in Q2, it was the opposite. For the first nine months of 2016, we’ve added 12 million global members, the same as in the first nine months of 2015.
By the end of Q3’16, we had un-grandfathered 75% of the members that are being un-grandfathered this year and the impact has been consistent with our expectations. ASP grew over 10% year-over-year in both the US and international segments (excluding a $35 million F/X impact). With more revenue, we can reinvest to further improve Netflix to attract new members from around the world, while continuing to delight our existing customers.
Domestically, revenue rose 23% year over year, 480 basis points faster than Q2. US marketing expense rose as a percentage of revenue as we spent to build awareness for our expanding number of original titles. US contribution profit increased 38% year-over-year with contribution margin expanding to 36%, slightly ahead of our 35% forecast.
In the international segment, we exceeded our internal projection for net adds as the acquisition impact of our originals was greater than anticipated across many of our markets. F/X-neutral revenue rose 72% and international contribution loss was flat sequentially at $69 million as content costs came in under our forecast due partly to timing. We are investing in more content across multiple international markets in Q4 and, as a result, we project international contribution loss to grow moderately to $75 million.
In September, we localized Netflix in Poland and Turkey. We began accepting payment in local currency and added a local language user interface, subtitles and dubbing as well as some local content. We have seen nice gains in viewing and retention and we’ll undertake other localization efforts in the coming months and years.
For Q4, we forecast 5.2 million global net adds, with 1.45 million net adds in the US and 3.75 million new members internationally. Our expectation for a moderate year-over-year decline in net adds reflects the completion of un-grandfathering. We are pleased with the results thus far as we expect ASP to grow 12% from Q1’16 to Q4’16. Internationally, the initial demand from our launch in Spain, Portugal and Italy in Q4’15 will also affect our year-over-year net adds comparison.
We will face a tough international net adds comparison in Q1’17 because of the initial membership surge in Q1’16 tied to the launch of 130 additional territories.
As discussed, for the balance of 2016, we will continue to operate around break even, and then start generating material global profits in 2017 and beyond, by marching up operating margins steadily for many years.
Content
We kicked off Q3 with the release of Stranger Things on July 15 to both critical and audience acclaim1. This nostalgic, supernatural thriller proved to be the blockbuster of the summer2 and is the kind of broad appeal, cross demographic, and cross border sensation that we hope will distinguish Netflix original content. Stranger Things is also notable as it is produced and owned by Netflix, which provides us with more attractive economics and greater business and creative control. In August, we launched The Get Down3, a highly stylized drama set in 1970s New York City, detailing the origins of hip-hop. We look forward to releasing part two of season one next year.
Our hit series Narcos returned for season two in September to great success among critics and audiences alike4. Narcos had a positive impact on member acquisition across all of our markets, demonstrating the ability for our tentpole franchises to connect with audiences across the world. We closed the quarter with Marvel’s Luke Cage5, the latest installment in our Marvel series, which will continue with Iron Fist6 on March 17, 2017. We are also looking forward next year to The Defenders7, a team-up of the characters from our first four Marvel series.
We are now in the fourth year of our original content strategy and are pleased with our progress. In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year. The Internet allows us to reach audiences all over the world and, with a growing base of over 86 million members, there’s a large appetite for entertainment and a diversity of tastes to satisfy.
We are fortunate that our Internet-centric, on-demand, subscription-only business model allows us to support programs for both mass and niche audiences alike. Our personalization algorithms help us promote the right content to the right viewers. And since we are not shelf-space constrained nor reliant on advertising, we have the luxury to tell all kinds of stories in less traditional ways. The growth of Internet TV globally has ushered in a new golden age of content, with consumers everywhere enjoying unprecedented access to amazing amounts of high quality programming.
With an expanding content budget (approximately $6 billion in 2017 on a P&L basis), we judge the success of our portfolio of originals in several ways. For each series or film, we measure the impact on acquisition and member engagement which, in turn, is correlated with retention. To determine relative performance, we look at each title’s share of viewing compared with its share of our content budget. We also take into account qualitative factors such as earned media coverage and awards, which enhance our brand and our ability to attract talent for future projects. This year, we are thrilled to have won nine Emmys (out of 54 nominations) across six different shows.
This past quarter, we announced a global pact with 20th Century Fox Studios to license The People vs. O.J. Simpson: American Crime Story and Queen of the South and an agreement with The Walt Disney Co. to license Quantico and American Crime in the US and Canada. We are also increasingly ensuring early financing and sharing windows globally with original broadcasters for series like Star Trek: Discovery from CBS, The Alienist from Paramount TV and the just-launched ABC series Designated Survivor from eOne.
________________________________________
1 http://www.imdb.com/title/tt4574334/?ref_=nv_sr_1
2 https://www.washingtonpost.com/news/arts-and-entertainment/wp/2016/08/18/in-a-dismal-movie-season-netflixs-stranger-things-is-our-great-summer-blockbuster/
3 https://www.rottentomatoes.com/tv/the_get_down/s01/
4 https://www.rottentomatoes.com/tv/narcos/s02/
5 https://www.rottentomatoes.com/tv/luke_cage/s01/
6 https://www.youtube.com/watch?v=0sEJeWB3RA8&feature=youtu.be
7 https://www.youtube.com/watch?v=wBZtM8q2Z1g&feature=youtu.be
Product and Partnerships
We continue to make progress with our MVPD partnerships. We are excited that the Netflix app will be available across Liberty Global’s footprint8 beginning in the Netherlands later this year and expanding to other countries in 2017. Partnerships like this and our integration on X1 with Comcast9 validate the strength of our content and that we are additive to the current offerings of MVPDs. By working together, MVPDs can sell richer Internet and TV packages, while consumers can more easily sign up for and access Netflix, thus allowing Netflix and our partners to better serve our shared customers.
China
The regulatory environment for foreign digital content services in China has become challenging. We now plan to license content to existing online service providers in China rather than operate our own service in China in the near term. We expect revenue from this licensing will be modest. We still have a long term desire to serve the Chinese people directly, and hope to launch our service in China eventually.
Competition
We face immense competition for consumer screen time. Despite video gaming getting better, video messaging and sharing improving, MVPD UI enhancements, YouTube growth, more SVOD services, and other screen time competitors, Netflix continues to win both time and affection. We presume that Amazon Prime Video will become as global as YouTube and Netflix this fall with the launch of the Jeremy Clarkson show. Our challenge is to continue to improve our service and content so that we better meet consumer desires. Total screen time is quite large and growing as technology and content improve globally.
Free Cash Flow and Capital Structure
In Q3, free cash flow was -$506 million vs. -$254 million in Q2’16 and -$252 million in the year ago quarter. The increase in our free cash flow deficit reflects the growth of original content, which we are increasingly producing and owning (rather than licensing). Self-produced shows like Stranger Things require more cash upfront as we incur spending during the creation of each show prior to its completion and release. In comparison, we generally pay on delivery for licensed originals like Orange is the New Black and we pay over the term of the agreement for licensed non-originals (eg, Scandal).
Over the long run, we believe self-producing is less expensive (including cost of capital) than licensing a series or film, as we work directly with the creative community and eliminate additional overhead and fees. In addition, we own the underlying intellectual property, providing us with global rights and more business and creative control. Combined with the success of our portfolio of originals and the positive impact on our member and revenue growth, we believe this is a wise investment that creates long term value. Consequently, we plan on investing more, which will continue to weigh on free cash flow. We expect Q4’16 FCF to be similar to Q3’16 FCF. Over time, we will be able to fund more of our investment in programming through the growth in operating profit and margin already underway.
Streaming content obligations at quarter end were $14.4 billion, up $1 billion sequentially. The increase reflects the addition of both new original and non-original content to our library as well as expanded rights for our new territories.
________________________________________
8 https://www.libertyglobal.com/pdf/press-release/2016-09-14-Liberty-Global-Lights-Up-TV-Screens-with-Global-Netflix-Partnership-FINAL.pdf
9 http://corporate.comcast.com/comcast-voices/netflix-on-comcast-beta
We finished the quarter with $1.3 billion in cash and equivalents. As we have often done over the past few years, we plan to raise additional debt in the coming weeks. With a debt to total capitalization ratio of about 5%, we remain underleveraged compared both to similar firms and to our view of an efficient capital structure. Our 2025 bonds continue to trade well.10
Reference
For quick reference, our eight most recent investor letters are: July 201611, April 201612, January, 201613, October 201514, July 201515, April 201516, January 201517 October 201418.
Conclusion
We have many fantastic titles to enjoy. For investors, though, we’d like to call out the The Crown19. If you appreciated Mad Men, House of Cards and Downton Abbey, we think you will find The Crown extraordinary. It debuts Nov. 4, three Fridays from now.
October 17th, 2016 Earnings Interview
Reed Hastings, David Wells and Ted Sarandos will participate in a live video interview today at 2:00 p.m. Pacific Time at youtube.com/netflixir. The discussion will be moderated by Ben Swinburne, Morgan Stanley and and Scott Devitt, Stifel. Questions that investors would like to see asked should be sent to benjamin.swinburne@morganstanley.com or swdevitt@stifel.com.
|
| |
IR Contact: | PR Contact: |
| Spencer Wang | Jonathan Friedland |
| Vice President, Finance & Investor Relations | Chief Communications Officer |
| 408 809-5360 | 310 734-2958 |
________________________________________
10 http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?symbol=NFLX4335215&ticker=C647295
11 http://files.shareholder.com/downloads/NFLX/2457496703x0x900152/4D4F0167-4BE2-4DC1-ACC7-759F1561CD59/Q216LettertoShareholders_FINAL_w_Tables.pdf
12 http://files.shareholder.com/downloads/NFLX/1662264494x0x886428/5FB5A3DF-F23A-4BB1-AC37-583BAEF2A1EE/Q116LettertoShareholders_W_TABLES_.pdf
13 http://files.shareholder.com/downloads/NFLX/1481171463x0x870685/C6213FF9-5498-4084-A0FF-74363CEE35A1/Q4_15_Letter_to_Shareholders_-_COMBINED.pdf
14 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x854558/9B28F30F-BF2F-4C5D-AAFF-AA9AA8F4779D/FINAL_Q3_15_Letter_to_Shareholders_With_Tables_.pdf
15 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x839404/C3CE9EE2-C8F3-40A1-AC9A-FFE0AFA20B21/FINAL_Q2_15_Letter_to_Shareholders_With_Tables_.pdf
16 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x821407/DB785B50-90FE-44DA-9F5B-37DBF0DCD0E1/Q1_15_Earnings_Letter_final_tables.pdf
17 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x804108/043a3015-36ec-49b9-907c-27960f1a7e57/Q4_14_Letter_to_shareholders.pdf
18 http://files.shareholder.com/downloads/NFLX/3754169286x0x786677/6974d8e9-5cb3-4009-97b1-9d4a5953a6a5/Q3_14_Letter_to_shareholders.pdf
19 https://www.youtube.com/watch?v=JWtnJjn6ng0&feature=youtu.be
Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-GAAP financial measures of net income on a pro forma basis excluding the release of tax reserves, revenue and ASP growth on a constant currency basis, free cash flow and EBITDA. Management believes that the non-GAAP measure of net income on a pro forma basis excluding the release of tax reserves provides useful information as this measure excludes effects that are not indicative of our core operating results. Management believes that the non-GAAP financial measures of revenue and ASP growth on a constant currency basis are useful in assessing underlying business performance excluding the effect of foreign currency rate fluctuations. Management believes that free cash flow and EBITDA are important liquidity metrics because they measure, 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. However, these non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net income, revenue, operating income, diluted earnings per share and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of these non-GAAP measures are contained in tabular form on the attached unaudited financial statements.
Forward-Looking Statements
This shareholder letter contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding content investments; localization efforts; ASP; profitability in 2017 and beyond; content releases and programming hours; our content budget; MVPD partnerships; business plans for China; future capital raises and timing of such raises; domestic and international net additions, and total and paid subscribers; revenue; contribution profit (loss) and contribution margin for both domestic (streaming and DVD) and international operations, as well as consolidated operating income and margin, net income, earnings per share and free cash flow. The forward-looking statements in this letter are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for streaming; fluctuations in consumer usage of our service; service disruptions; production risks; actions of Internet Service Providers; and, competition, including consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 28, 2016. The Company provides internal forecast numbers. Investors should anticipate that actual performance will vary from these forecast numbers based on risks and uncertainties discussed above and in our Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this shareholder letter.
Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2016 | | June 30,
2016 | | September 30,
2015 | | September 30,
2016 | | September 30,
2015 |
| Revenues | $ | 2,290,188 |
| | $ | 2,105,204 |
| | $ | 1,738,355 |
| | $ | 6,353,128 |
| | $ | 4,956,178 |
|
| Cost of revenues | 1,532,844 |
| | 1,473,098 |
| | 1,173,958 |
| | 4,375,482 |
| | 3,342,111 |
|
| Marketing | 282,043 |
| | 216,029 |
| | 208,102 |
| | 706,082 |
| | 599,919 |
|
| Technology and development | 216,099 |
| | 207,300 |
| | 171,762 |
| | 626,907 |
| | 469,929 |
|
| General and administrative | 153,166 |
| | 138,407 |
| | 110,892 |
| | 418,798 |
| | 298,287 |
|
| Operating income | 106,036 |
| | 70,370 |
| | 73,641 |
| | 225,859 |
| | 245,932 |
|
| Other income (expense): | | | | | | | | | |
| Interest expense | (35,536 | ) | | (35,455 | ) | | (35,333 | ) | | (106,528 | ) | | (97,287 | ) |
| Interest and other income (expense) | 8,627 |
| | 16,317 |
| | 3,930 |
| | 50,907 |
| | (27,491 | ) |
| Income before income taxes | 79,127 |
| | 51,232 |
| | 42,238 |
| | 170,238 |
| | 121,154 |
|
| Provision for income taxes | 27,610 |
| | 10,477 |
| | 12,806 |
| | 50,308 |
| | 41,691 |
|
| Net income | $ | 51,517 |
| | $ | 40,755 |
| | $ | 29,432 |
| | $ | 119,930 |
| | $ | 79,463 |
|
| Earnings per share: | | | | | | | | | |
| Basic | $ | 0.12 |
| | $ | 0.10 |
| | $ | 0.07 |
| | $ | 0.28 |
| | $ | 0.19 |
|
| Diluted | $ | 0.12 |
| | $ | 0.09 |
| | $ | 0.07 |
| | $ | 0.27 |
| | $ | 0.18 |
|
| Weighted-average common shares outstanding: | | | | | | | | | |
| Basic | 428,937 |
| | 428,483 |
| | 426,869 |
| | 428,514 |
| | 425,289 |
|
| Diluted | 438,389 |
| | 438,154 |
| | 437,606 |
| | 438,180 |
| | 435,849 |
|
Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
|
| | | | | | | |
| | As of |
| | September 30,
2016 | | December 31,
2015 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 969,158 |
| | $ | 1,809,330 |
|
| Short-term investments | 374,098 |
| | 501,385 |
|
| Current content assets, net | 3,632,399 |
| | 2,905,998 |
|
| Other current assets | 218,238 |
| | 215,127 |
|
| Total current assets | 5,193,893 |
| | 5,431,840 |
|
| Non-current content assets, net | 6,677,674 |
| | 4,312,817 |
|
| Property and equipment, net | 191,876 |
| | 173,412 |
|
| Other non-current assets | 283,895 |
| | 284,802 |
|
| Total assets | $ | 12,347,338 |
| | $ | 10,202,871 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Current content liabilities | $ | 3,497,214 |
| | $ | 2,789,023 |
|
| Accounts payable | 285,753 |
| | 253,491 |
|
| Accrued expenses | 201,232 |
| | 140,389 |
|
| Deferred revenue | 427,206 |
| | 346,721 |
|
| Total current liabilities | 4,411,405 |
| | 3,529,624 |
|
| Non-current content liabilities | 2,975,189 |
| | 2,026,360 |
|
| Long-term debt | 2,373,966 |
| | 2,371,362 |
|
| Other non-current liabilities | 57,812 |
| | 52,099 |
|
| Total liabilities | 9,818,372 |
| | 7,979,445 |
|
| Stockholders' equity: | | | |
| Common stock | 1,503,641 |
| | 1,324,809 |
|
| Accumulated other comprehensive loss | (36,530 | ) | | (43,308 | ) |
| Retained earnings | 1,061,855 |
| | 941,925 |
|
| Total stockholders' equity | 2,528,966 |
| | 2,223,426 |
|
| Total liabilities and stockholders' equity | $ | 12,347,338 |
| | $ | 10,202,871 |
|
Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2016 |
| June 30,
2016 |
| September 30,
2015 |
| September 30,
2016 |
| September 30,
2015 |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | $ | 51,517 |
| | $ | 40,755 |
| | $ | 29,432 |
| | $ | 119,930 |
| | $ | 79,463 |
|
| Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | |
| Additions to streaming content assets | (2,442,080 | ) | | (1,791,766 | ) | | (1,304,466 | ) | | (6,550,445 | ) | | (4,221,326 | ) |
| Change in streaming content liabilities | 529,885 |
| | 238,517 |
| | 104,684 |
| | 1,674,125 |
| | 922,163 |
|
| Amortization of streaming content assets | 1,224,108 |
| | 1,175,361 |
| | 871,403 |
| | 3,457,990 |
| | 2,443,521 |
|
| Amortization of DVD content assets | 19,284 |
| | 20,021 |
| | 18,589 |
| | 59,746 |
| | 60,587 |
|
| Depreciation and amortization of property, equipment and intangibles | 14,410 |
| | 14,131 |
| | 16,047 |
| | 43,339 |
| | 46,795 |
|
| Stock-based compensation expense | 43,495 |
| | 44,112 |
| | 32,834 |
| | 130,029 |
| | 88,865 |
|
| Excess tax benefits from stock-based compensation | (12,762 | ) | | (13,323 | ) | | (37,726 | ) | | (37,401 | ) | | (106,154 | ) |
| Other non-cash items | 9,682 |
| | 9,040 |
| | 10,866 |
| | 31,479 |
| | 23,854 |
|
| Deferred taxes | 14,338 |
| | (17,876 | ) | | (29,417 | ) | | (20,141 | ) | | (70,691 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Other current assets | 10,250 |
| | 24,091 |
| | 66,695 |
| | 48,649 |
| | 81,448 |
|
| Accounts payable | 27,810 |
| | 8,795 |
| | 6,762 |
| | 16,707 |
| | 2,584 |
|
| Accrued expenses | 28,957 |
| | 2,099 |
| | 10,883 |
| | 72,288 |
| | 88,429 |
|
| Deferred revenue | 30,230 |
| | 22,753 |
| | 27,985 |
| | 80,485 |
| | 55,153 |
|
| Other non-current assets and liabilities | (11,065 | ) | | (3,003 | ) | | (20,540 | ) | | (43,604 | ) | | 615 |
|
| Net cash used in operating activities | (461,941 | ) | | (226,293 | ) | | (195,969 | ) | | (916,824 | ) | | (504,694 | ) |
| Cash flows from investing activities: | | | | | | | | | |
| Acquisition of DVD content assets | (17,249 | ) | | (17,924 | ) | | (14,467 | ) | | (58,380 | ) | | (57,159 | ) |
| Purchases of property and equipment | (27,366 | ) | | (10,814 | ) | | (37,820 | ) | | (46,605 | ) | | (78,394 | ) |
| Change in other assets | 125 |
| | 907 |
| | (3,760 | ) | | 676 |
| | (4,174 | ) |
| Purchases of short-term investments | (128,136 | ) | | (18,492 | ) | | (66,444 | ) | | (181,590 | ) | | (225,333 | ) |
| Proceeds from sale of short-term investments | 171,747 |
| | 18,752 |
| | 43,887 |
| | 198,687 |
| | 144,247 |
|
| Proceeds from maturities of short-term investments | 24,855 |
| | 24,675 |
| | 31,125 |
| | 112,555 |
| | 82,182 |
|
| Net cash provided by (used in) investing activities | 23,976 |
| | (2,896 | ) | | (47,479 | ) | | 25,343 |
| | (138,631 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of common stock | 3,819 |
| | 4,232 |
| | 35,089 |
| | 11,587 |
| | 69,809 |
|
| Proceeds from issuance of debt | — |
| | — |
| | — |
| | — |
| | 1,500,000 |
|
| Issuance costs | — |
| | — |
| | — |
| | — |
| | (17,629 | ) |
| Excess tax benefits from stock-based compensation | 12,762 |
| | 13,323 |
| | 37,726 |
| | 37,401 |
| | 106,154 |
|
| Other financing activities | 58 |
| | 57 |
| | (61 | ) | | 170 |
| | (599 | ) |
| Net cash provided by financing activities | 16,639 |
| | 17,612 |
| | 72,754 |
| | 49,158 |
| | 1,657,735 |
|
| Effect of exchange rate changes on cash and cash equivalents | (441 | ) | | (2,742 | ) | | (7,741 | ) | | 2,151 |
| | (12,581 | ) |
| Net (decrease) increase in cash and cash equivalents | (421,767 | ) | | (214,319 | ) | | (178,435 | ) | | (840,172 | ) | | 1,001,829 |
|
| Cash and cash equivalents, beginning of period | 1,390,925 |
| | 1,605,244 |
| | 2,293,872 |
| | 1,809,330 |
| | 1,113,608 |
|
| Cash and cash equivalents, end of period | $ | 969,158 |
| | $ | 1,390,925 |
| | $ | 2,115,437 |
| | $ | 969,158 |
| | $ | 2,115,437 |
|
| | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2016 | | June 30,
2016 | | September 30,
2015 | | September 30,
2016 | | September 30,
2015 |
| Non-GAAP free cash flow reconciliation: | | | | | | | | | |
| Net cash used in operating activities | $ | (461,941 | ) | | $ | (226,293 | ) | | $ | (195,969 | ) | | $ | (916,824 | ) | | $ | (504,694 | ) |
| Acquisition of DVD content assets | (17,249 | ) | | (17,924 | ) | | (14,467 | ) | | (58,380 | ) | | (57,159 | ) |
| Purchases of property and equipment | (27,366 | ) | | (10,814 | ) | | (37,820 | ) | | (46,605 | ) | | (78,394 | ) |
| Change in other assets | 125 |
| | 907 |
| | (3,760 | ) | | 676 |
| | (4,174 | ) |
| Non-GAAP free cash flow | $ | (506,431 | ) | | $ | (254,124 | ) | | $ | (252,016 | ) | | $ | (1,021,133 | ) | | $ | (644,421 | ) |
NOTE - Certain prior year amounts have been reclassified to conform to the current year presentation.
Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | As of / Three Months Ended | | As of/ Nine Months Ended |
| | September 30,
2016 | | June 30,
2016 | | September 30,
2015 | | September 30,
2016 | | September 30,
2015 |
| Domestic Streaming | | | | | | | | | |
| Total memberships at end of period | 47,497 |
| | 47,129 |
| | 43,181 |
| | 47,497 |
| | 43,181 |
|
| Paid memberships at end of period | 46,479 |
| | 46,004 |
| | 42,068 |
| | 46,479 |
| | 42,068 |
|
| | | | | | | | | | |
| Revenues | $ | 1,304,333 |
| | $ | 1,208,271 |
| | $ | 1,063,961 |
| | $ | 3,673,845 |
| | $ | 3,074,406 |
|
| Cost of revenues | 720,658 |
| | 707,106 |
| | 644,914 |
| | 2,094,310 |
| | 1,840,134 |
|
| Marketing | 108,495 |
| | 86,806 |
| | 74,835 |
| | 277,243 |
| | 237,813 |
|
| Contribution profit | 475,180 |
| | 414,359 |
| | 344,212 |
| | 1,302,292 |
| | 996,459 |
|
| | | | | | | | | | |
| International Streaming | | | | | | | | | |
| Total memberships at end of period | 39,246 |
| | 36,048 |
| | 25,987 |
| | 39,246 |
| | 25,987 |
|
| Paid memberships at end of period | 36,799 |
| | 33,892 |
| | 23,951 |
| | 36,799 |
| | 23,951 |
|
| | | | | | | | | | |
| Revenues | $ | 853,480 |
| | $ | 758,201 |
| | $ | 516,870 |
| | $ | 2,263,429 |
| | $ | 1,387,030 |
|
| Cost of revenues | 748,515 |
| | 698,162 |
| | 451,251 |
| | 2,076,576 |
| | 1,249,495 |
|
| Marketing | 173,548 |
| | 129,223 |
| | 133,267 |
| | 428,839 |
| | 362,106 |
|
| Contribution profit (loss) | (68,583 | ) | | (69,184 | ) | | (67,648 | ) | | (241,986 | ) | | (224,571 | ) |
| | | | | | | | | | |
| Domestic DVD | | | | | | | | | |
| Total memberships at end of period | 4,273 |
| | 4,530 |
| | 5,060 |
| | 4,273 |
| | 5,060 |
|
| Paid memberships at end of period | 4,194 |
| | 4,435 |
| | 4,971 |
| | 4,194 |
| | 4,971 |
|
| | | | | | | | | | |
| Revenues | $ | 132,375 |
| | $ | 138,732 |
| | $ | 157,524 |
| | $ | 415,854 |
| | $ | 494,742 |
|
| Cost of revenues | 63,671 |
| | 67,830 |
| | 77,793 |
| | 204,596 |
| | 252,482 |
|
| Contribution profit | 68,704 |
| | 70,902 |
| | 79,731 |
| | 211,258 |
| | 242,260 |
|
| | | | | | | | | | |
| Consolidated | | | | | | | | | |
| | | | | | | | | | |
| Revenues | $ | 2,290,188 |
| | $ | 2,105,204 |
| | $ | 1,738,355 |
| | $ | 6,353,128 |
| | $ | 4,956,178 |
|
| Cost of revenues | 1,532,844 |
| | 1,473,098 |
| | 1,173,958 |
| | 4,375,482 |
| | 3,342,111 |
|
| Marketing | 282,043 |
| | 216,029 |
| | 208,102 |
| | 706,082 |
| | 599,919 |
|
| Contribution profit | 475,301 |
| | 416,077 |
| | 356,295 |
| | 1,271,564 |
| | 1,014,148 |
|
| Other operating expenses | 369,265 |
| | 345,707 |
| | 282,654 |
| | 1,045,705 |
| | 768,216 |
|
| Operating income | 106,036 |
| | 70,370 |
| | 73,641 |
| | 225,859 |
| | 245,932 |
|
| Other income (expense) | (26,909 | ) | | (19,138 | ) | | (31,403 | ) | | (55,621 | ) | | (124,778 | ) |
| Provision for income taxes | 27,610 |
| | 10,477 |
| | 12,806 |
| | 50,308 |
| | 41,691 |
|
| Net income | $ | 51,517 |
| | $ | 40,755 |
| | $ | 29,432 |
| | $ | 119,930 |
| | $ | 79,463 |
|
Netflix, Inc.
Non-GAAP Information
(unaudited)
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30,
2015 | | December 31,
2015 | | March 31,
2016 | | June 30,
2016 | | September 30,
2016 |
| Non-GAAP Adjusted EBITDA reconciliation: | | | | | | | | | |
| GAAP net income | $ | 29,432 |
| | $ | 43,178 |
| | $ | 27,658 |
| | $ | 40,755 |
| | $ | 51,517 |
|
| Add: | | | | | | | | | |
| Interest and other (income) expense | 31,403 |
| | 39,163 |
| | 9,574 |
| | 19,138 |
| | 26,909 |
|
| Provision (benefit) for income taxes | 12,806 |
| | (22,447 | ) | | 12,221 |
| | 10,477 |
| | 27,610 |
|
| Depreciation and amortization of property, equipment and intangibles | 16,047 |
| | 15,488 |
| | 14,798 |
| | 14,131 |
| | 14,410 |
|
| Stock-based compensation expense | 32,834 |
| | 35,860 |
| | 42,422 |
| | 44,112 |
| | 43,495 |
|
| Adjusted EBITDA | $ | 122,522 |
| | $ | 111,242 |
| | $ | 106,673 |
| | $ | 128,613 |
| | $ | 163,941 |
|
|
| | | | | | | | | | | | | | | | | |
| | As Reported | | Currency Translation Adjustment | | Adjusted revenue at 2015 rates | | Reported Change | | Constant Currency Change |
| Non-GAAP reconciliation of reported and constant currency revenue growth for the quarter ended September 30, 2016: | | |
| Global streaming revenue | $ | 2,157,813 |
| | $ | 34,887 |
| | $ | 2,192,700 |
| | 36 | % | | 39 | % |
| International streaming revenue | 853,480 |
| | 34,887 |
| | 888,367 |
| | 65 | % | | 72 | % |
|
| | | | |
| | | Three Months Ended |
| | | December 31,
2015 |
| Non-GAAP net income reconciliation: | | |
| GAAP net income | | $ | 43,178 |
|
| Less: Release of tax accrual | | (13,438 | ) |
| Non-GAAP net income | | $ | 29,740 |
|
| Non-GAAP earnings per share: | | |
| Basic | | $ | 0.07 |
|
| Diluted | | $ | 0.07 |
|
| Weighted-average common shares outstanding: | | |
| Basic | | 427,668 |
|
| Diluted | | 438,257 |
|
