Netflix, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited interim results. Netflix operates a global subscription streaming service and a U.S. DVD-by-mail business. Results are not necessarily indicative of a full year.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $7.868 billion | $7.163 billion | +10% |
| Operating income | $1.972 billion | $1.960 billion | +1% |
| Operating margin | 25% | 27% | Down 2 percentage points |
| Net income | $1.597 billion | $1.707 billion | Down 6% |
| Diluted earnings per share | $3.53 | $3.75 | Down 6% |
| Operating cash flow | $923 million | $777 million | +19% |
| Free cash flow (non-GAAP) | $802 million | $692 million | +16% |
- Streaming revenue was $7.828 billion, up 10%; DVD revenue was $40 million, down 20%. Average monthly revenue per paying membership rose 2% to $11.77, while average paying memberships increased 8%.
- Global paid memberships ended the quarter at 221.641 million, up 7% year over year. Netflix reported a net loss of 203,000 paid memberships in Q1, versus net additions of 3.976 million a year earlier. UCAN, EMEA and LATAM had net losses; APAC added 1.087 million.
- Cost of revenue rose 11% to $4.285 billion. Content amortization increased 16% to $3.166 billion. Marketing rose 8%, technology and development 25%, and general and administrative expense 34%.
- Cash, cash equivalents and restricted cash totaled $6.035 billion at quarter end. Debt, net of issuance costs, was $14.535 billion, all long-term; the $1 billion revolving credit facility was undrawn. Netflix repaid $700 million of notes at maturity and reported compliance with debt covenants.
- Total assets were $45.331 billion and total liabilities were $27.787 billion. Net content assets were $31.192 billion.
Material changes and management commentary
- Revenue growth reflected 8% growth in average paying memberships and a 2% increase in average monthly revenue per paying membership, including the impact of price changes. Management said stronger U.S. dollar exchange rates partly offset revenue growth; revenue would have been approximately $280 million higher at prior-year exchange rates.
- Operating margin declined because revenue grew more slowly than content amortization. Management attributed higher amortization partly to content releases delayed by COVID-19 disruptions in the prior-year comparison period.
- Operating cash flow and free cash flow increased, although content cash payments continued to exceed amortization. Content payments were $3.931 billion, about $765 million more than content amortization. Management cited higher revenue as a key support to operating cash flow, partly offset by increased content and operating costs.
- Management said it expects to continue significantly increasing investment in global content, particularly original content, which requires cash earlier than the related amortization expense. It expected operating cash flows, available funds and financing access to meet cash needs for the next 12 months and beyond, while noting that financing may not be available on acceptable terms.
Outlook, risks and contingencies
- The supplied filing text does not provide clear numerical forward guidance for revenue, earnings, membership or margin. Management identifies membership growth, content and pricing changes, foreign exchange, expenses, liquidity and free cash flow among forward-looking areas, subject to risks and uncertainty.
- Content obligations totaled $22.366 billion, including $15.4 billion not yet recognized on the balance sheet because recognition criteria were not met. Management estimated additional unknown future-title obligations could be approximately $1 billion to $4 billion over the next three years; actual amounts may differ.
- Known content, debt and operating lease obligations totaled $45.097 billion, including $10.986 billion expected within 12 months. The company also warned that unknown future content commitments are significant.
- COVID-19-related production disruption and health and safety requirements could affect production schedules and costs. Foreign currency exposure is material: 58% of Q1 revenue was denominated in currencies other than the U.S. dollar, and Netflix said it does not hedge foreign currency exposures with contracts or derivatives.
- Legal proceedings arise in the ordinary course of business; the filing says unlisted matters were not considered material individually or in aggregate at the time. No material changes to previously disclosed risk factors were reported. Tax examinations are ongoing, and the company could not estimate the range of possible adjustments to unrecognized tax benefits.
Important facts for investors to verify
- Membership trends: reported net losses in Q1 and the regional mix, alongside continued growth in average revenue per paying member.
- Whether pricing, content releases and subscriber behavior support revenue and operating-margin performance in subsequent periods.
- Content spending and amortization: upfront cash payments, recorded and unrecorded obligations, and the estimates for unknown future-title commitments.
- Cash generation relative to net income, especially the impact of content payments, foreign-exchange movements and working capital on free cash flow.
- Foreign-exchange exposure, debt and lease obligations, tax examination developments, and any changes in litigation or production disruption.