Netflix, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this filing is an annual report; selected Q4 results are included below. Unless otherwise noted, dollar amounts are in millions.
Business context
Netflix provided subscription streaming in the U.S., Canada, Latin America and the Caribbean, and DVD-by-mail in the U.S. The company’s stated priority was growing streaming domestically and internationally. From Q4 2011, it reported Domestic streaming, International streaming and Domestic DVD as separate operating segments.
In July 2011, Netflix separated U.S. DVD and streaming plans, raising prices for customers who wanted both. The resulting consumer backlash and cancellations prompted the company to abandon planned DVD rebranding and website separation.
Financial results and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $3,204.6 | $2,162.6 | +48.2% |
| Gross profit / margin | $1,164.7 / 36.3% | $805.3 / 37.2% | Margin down |
| Operating income / margin | $376.1 / 11.7% | $283.6 / 13.1% | Income +32.6% |
| Net income / margin | $226.1 / 7.1% | $160.9 / 7.4% | Income +40.6% |
| Diluted EPS | $4.16 | $2.96 | +40.5% |
| Operating cash flow | $317.7 | $276.4 | +14.9% |
| Free cash flow (non-GAAP) | $186.6 | $131.0 | +42.4% |
Revenue growth reflected a 49.1% increase in average domestic paying subscribers and international expansion. Domestic average monthly revenue per paying subscriber declined 3.0% to $11.84, partly as customers chose lower-priced streaming plans. Content costs rose sharply: cost of revenue increased 50.3%, and subscription costs increased 55.1%, primarily from streaming content investment.
At year-end, cash, cash equivalents and short-term investments totaled $797.8, versus $350.4 a year earlier; working capital was $605.8. Total debt was $400.0: $200.0 of 8.50% senior notes due 2017 and $200.0 of zero-coupon senior convertible notes due 2018. Netflix raised $200.0 through a common-stock offering and $200.0 through the convertible notes in Q4. It reported $1,966.6 of net content-library assets and $1,664.3 of content liabilities.
FY2011 consolidated unique subscribers reached 26.253 million, up from 20.010 million. Net additions were 6.243 million versus 7.742 million in 2010; domestic additions fell 32.3%. Domestic churn increased to 4.9% from 3.8%.
Q4 2011: Revenue was $875.6, up from $595.9 in Q4 2010; net income was $35.2, down from $47.1. Segment contribution profit was $52.1 for Domestic streaming, a $59.7 loss for International streaming, and $193.8 for Domestic DVD.
Changes, outlook and notable items
- Domestic unique subscribers returned to growth in Q4 after a net loss in Q3, but FY2011 domestic net additions were substantially lower than in 2010. Management attributed the recovery to continued popularity of streaming.
- International streaming generated a $103.1 contribution loss in 2011. Netflix expected further significant international losses in 2012, including from its January 2012 UK and Ireland launch, and said it did not intend to enter additional markets until reaching global profitability.
- Management expected Q1 2012 revenue to be flat sequentially, anticipated slower full-year revenue growth than in 2011, and expected consolidated net losses and possible cash use in 2012. It targeted an 11% Domestic streaming contribution margin for Q1 2012 and further expansion over the following 12 months.
- Streaming content obligations were reported at $3.907 billion, including $797.6 due in less than one year and $2.384 billion in one to three years. The filing cautions that the table may not reliably indicate future cash outflows; additional commitments with uncertain title counts or pricing were expected to be significant. The company also disclosed $905.8 of current streaming content accounts payable outside the contractual-obligations table.
- Q4 net income included a $9.0 legal settlement expense under the Video Privacy Protection Act and $9.5 of termination benefits related to retracting the DVD separation and rebranding plans. A further $1.8 of termination expense was expected in Q1 2012. The $9.0 settlement was expected to be paid in 2012.
- The filing identifies risks including subscriber cancellations and brand recovery, competition, costly or unavailable content licenses, fixed content commitments, international execution, reliance on Amazon Web Services and other third parties, and litigation. Two shareholder class actions filed in January 2012 and a derivative action were disclosed; management considered potential losses reasonably possible but not estimable.
Important facts for investors to verify
- Whether subscriber growth, churn and revenue per subscriber recover after the 2011 pricing and plan changes.
- Whether the Domestic streaming contribution-margin target is achieved and international losses remain within expectations.
- The cash-payment schedule and economic flexibility of content commitments, including obligations excluded from the disclosed table.
- Actual 2012 cash flow, liquidity needs and compliance with debt covenants if losses and content spending rise.
- Developments in the disclosed legal matters, including the VPPA settlement and shareholder litigation.