Netflix, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. Netflix operates as one segment, providing streaming entertainment globally, with more than 269 million paid memberships at quarter-end.
Financial and operating results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $9.370 billion | $8.162 billion | Up 15% |
| Operating income | $2.633 billion | $1.714 billion | Up 54% |
| Operating margin | 28% | 21% | Up 7 percentage points |
| Net income | $2.332 billion | $1.305 billion | Up 79% |
| Diluted EPS | $5.28 | $2.88 | Up |
| Operating cash flow | $2.213 billion | $2.179 billion | Up 2% |
- Streaming revenue increased 15%, primarily from higher average paying memberships and price increases, partly offset by unfavorable foreign exchange. Paid net additions were 9.326 million; paid memberships ended the quarter at 269.602 million, up 16% year over year.
- Regional revenue growth: UCAN 17%, EMEA 17%, LATAM 9%, and APAC 10%. Average monthly revenue per paying membership increased 7% in UCAN, was essentially flat in EMEA, and declined 4% in LATAM and 8% in APAC; constant-currency movements differed.
- Cost of revenues rose 4% to $4.977 billion, slower than revenue growth; content amortization increased $211 million. Marketing increased 18%, mainly due to advertising tied to content-release timing and higher personnel costs. Technology and development and general and administrative costs were relatively flat.
- Cash, cash equivalents, restricted cash, and short-term investments totaled $7.048 billion at quarter-end. Debt, net of issuance costs, was $14.016 billion, down $527 million from year-end; $1.476 billion of principal and interest is due within 12 months. Netflix repaid $400 million of notes at maturity and reported no borrowings on its $1 billion revolving facility.
- Content assets were $31.662 billion. Content obligations totaled $24.195 billion, including $17.4 billion not recognized on the balance sheet; $11.066 billion is expected due within one year. Operating lease obligations totaled $2.977 billion.
Material changes and notable items
- Operating margin improved as revenue grew faster than most operating expenses; management attributed the increase primarily to revenue growth relative to cost of revenues, general and administrative, and technology and development costs.
- Operating cash flow was nearly flat year over year despite higher net income, primarily because content-asset cash payments increased $1.105 billion, or 39%, to $3.918 billion.
- Net cash used in financing increased, reflecting $2.0 billion of share repurchases, compared with $400 million in Q1 2023, and the $400 million debt repayment. The company repurchased 3.567 million shares; $6.4 billion remained authorized for repurchases.
- Interest and other income was $155 million versus a $71 million expense in Q1 2023. The change was primarily driven by foreign-exchange gains, including a $131 million non-cash gain from remeasurement of euro-denominated notes; interest income also increased.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue, earnings, or margin guidance. Management said operating cash flow, available funds, and financing access are expected to meet cash needs for the next 12 months and beyond, while anticipating significant continued investment in global and original content.
- Management estimates unknown future content-title obligations could be approximately $1 billion to $4 billion over the next three years, with most payments expected after the next 12 months; actual amounts may differ.
- Foreign currency exposure is material: non-U.S.-dollar currencies represented 56% of revenue and 31% of operating expenses. Hedging may reduce but does not eliminate exposure. Management estimated Q1 revenue would have been about $271 million higher at prior-year exchange rates, excluding realized hedge impacts.
- Potential exposure from Brazilian non-income-tax assessments was estimated at approximately $300 million and expected to increase over time; the company believes it has defenses, but outcomes remain uncertain. The filing also describes ordinary-course litigation and indemnification obligations for which maximum potential payments cannot be reasonably estimated.
- Netflix reported compliance with debt covenants and no material changes to previously disclosed risk factors. Subsequent to quarter-end, it entered into a new five-year, $3 billion unsecured revolving credit facility, with no borrowings outstanding as of April 22, 2024.
Important facts for investors to verify
- Whether membership growth and pricing can sustain revenue gains, particularly as average revenue per membership trends vary by region.
- Whether margin improvement continues as content amortization, marketing, and production cash requirements evolve.
- The timing and scale of the $24.2 billion disclosed content obligations, including the estimated but uncommitted future-title range.
- Cash generation after content spending, share repurchases, and debt maturities; also confirm liquidity and refinancing access.
- Foreign-exchange effects, including the distinction between reported results, hedge impacts, and non-cash debt remeasurement gains.
- Developments in Brazilian tax matters and other legal or contingent exposures.