Netflix, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with Q1 2022 unless stated otherwise. Netflix reported more than 232 million paid memberships across over 190 countries and operates as one segment.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $8.162 billion | $7.868 billion | +4% |
| Operating income | $1.714 billion | $1.972 billion | -13% |
| Operating margin | 21% | 25% | -4 percentage points |
| Net income | $1.305 billion | $1.597 billion | -18% |
| Diluted EPS | $2.88 | $3.53 | -18% |
| Operating cash flow | $2.179 billion | $0.923 billion | +$1.256 billion |
| Free cash flow (non-GAAP) | $2.117 billion | $0.802 billion | +$1.315 billion |
Cost of revenue rose 12% to $4.804 billion, or 59% of revenue versus 54% a year earlier. Content amortization increased $294 million, while other content costs also rose. Marketing was essentially flat; technology and development increased 5%, and general and administrative expense increased 1%.
Paid memberships ended the quarter at 232.498 million, up 5% year over year, with net additions of 1.751 million versus a net loss of 203,000 in Q1 2022. Average monthly revenue per paying membership decreased 1% to $11.70. Regional revenue grew 8% in UCAN, declined 2% in EMEA, grew 7% in LATAM, and grew 2% in APAC. APAC led membership growth at 17%; LATAM had a net loss of 450,000 memberships in the quarter.
Liquidity, debt, and capital commitments
Cash, cash equivalents, restricted cash, and short-term investments totaled $7.851 billion at March 31, 2023, up $1.769 billion from year-end. Current assets were $10.483 billion and current liabilities were $8.316 billion. Debt, net of issuance costs, was $14.437 billion, including $399 million classified as short-term. The company had no borrowings under its $1 billion revolving credit facility and reported compliance with debt covenants. Principal and interest due over the next 12 months totaled $685 million.
Q1 operating cash flow improved chiefly because cash payments for content assets decreased; Netflix reported $2.813 billion of content payments versus $3.460 billion of content amortization. The company repurchased 1.222 million shares for $400 million, with $4.0 billion remaining under its authorization.
Content obligations totaled $21.526 billion: $7.253 billion recorded as current and non-current content liabilities and $14.3 billion not yet recognized on the balance sheet. Netflix estimated additional obligations for unknown future titles could be approximately $1 billion to $4 billion over the next three years, mostly payable after the next 12 months. Contractual obligations also include $17.899 billion of debt payments and $3.310 billion of operating lease payments.
Changes, outlook, and risks
- Revenue growth reflected 4% growth in average paying memberships, partly offset by a 1% decline in average monthly revenue per membership. Management attributed the latter mainly to foreign-exchange movements and plan mix, partly offset by pricing changes.
- Operating margin contracted as operating expenses grew faster than revenue; management cited content costs and foreign-exchange effects among the pressures.
- Foreign currencies represented 57% of Q1 revenue. The company estimated revenue would have been about $346 million higher at prior-year exchange rates. It recorded a $107 million foreign-exchange loss, including an $81 million non-cash remeasurement loss on euro-denominated notes, and does not hedge foreign-currency exposures with derivatives.
- Management said operating cash flow, available funds, and financing sources should meet cash needs for the next 12 months and beyond. It expects continued significant investment in global content, particularly original content, and said future capital needs from debt markets are expected to be more limited than in prior years. The filing provides no specific quarterly or full-year financial guidance.
- In April 2023, Netflix announced plans to discontinue its DVD-by-mail service and did not expect a material effect on operations or financial results.
- Legal claims arise in the ordinary course; the company said it did not consider unlisted matters material individually or in aggregate at the time of filing. IRS examinations cover 2016–2018, and tax authorities may examine other returns. The company said potential changes to unrecognized tax benefits within 12 months could be significant, but it could not estimate a range.
- Management reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and effective disclosure controls. Interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether revenue and membership growth can sustain profitability as content costs rise and operating margin remains below the prior-year level.
- How much Q1 free cash flow reflects timing of content payments versus durable operating cash generation.
- The scale and payment timing of recognized and unrecognized content commitments, including uncertain future-title obligations.
- Exposure of revenue, operating income, and debt balances to foreign-exchange movements, given the absence of currency hedging.
- Debt maturities, planned repurchases, tax examination outcomes, and any developments in legal contingencies.