Netflix, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results compared with Q1 2020. Netflix operates as one segment and reported approximately 207.6 million paid streaming memberships in more than 190 countries at quarter-end.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $7.16 billion | $5.77 billion | +24% |
| Operating income | $1.96 billion | $958 million | +105% |
| Operating margin | 27.4% | 16.6% | +10.8 percentage points |
| Net income | $1.71 billion | $709 million | +141% |
| Diluted EPS | $3.75 | $1.57 | — |
| Cash from operating activities | $777 million | $260 million | +199% |
| Free cash flow (non-GAAP) | $692 million | $162 million | +328% |
Streaming revenue rose 25% to $7.11 billion; DVD revenue declined 23% to $50 million. Revenue growth reflected 18% growth in average paying memberships and a 6% increase in average monthly revenue per paying membership, to $11.53. Cost of revenues increased 7%, slower than revenue growth, and equaled 54% of revenue versus 62% a year earlier. Content amortization was $2.72 billion, up 9%.
Net income included $269 million of interest and other income, principally a $258 million foreign-exchange gain, including a non-cash gain from remeasurement of euro-denominated debt. This compares with $22 million of interest and other income in Q1 2020. The effective tax rate was 16%, versus 11%.
Membership and regional trends
Paid net additions fell 75% to 4.0 million from 15.8 million. Netflix attributed the comparison primarily to unusually strong Q1 2020 additions associated with the COVID-19 pandemic. Ending paid memberships increased 14% year over year. Regional streaming revenue growth was 17% in UCAN, 36% in EMEA, 5% in LATAM, and 58% in APAC. Q1 net additions declined year over year in each region.
Liquidity, debt, and commitments
- Cash, cash equivalents, and restricted cash totaled $8.44 billion at March 31, up $198 million from year-end. Balance-sheet cash and cash equivalents were $8.40 billion.
- Debt, net of issuance costs, was $15.56 billion, down $750 million from December 31, partly reflecting repayment at maturity of $500 million of notes. Netflix reported $1.45 billion of principal and interest due within one year and no borrowings on its $750 million revolving credit facility.
- Operating cash flow less property and equipment purchases and change in other assets yielded $692 million of free cash flow. Content cash payments exceeded content amortization by $831 million, a significant drag relative to net income.
- Content obligations totaled $20.73 billion, including $13.9 billion not yet recognized on the balance sheet. The filing estimates an additional $1–$4 billion of obligations for unknown future titles over the next three years; these are excluded from the contractual-obligations table.
- The board authorized up to $5 billion of share repurchases, with no expiration date; none had been made by March 31.
Outlook, commentary, and risks
Management expected slower paid net additions in the first half of 2021 than in the comparable 2020 periods, while noting that pandemic effects were difficult to predict. Netflix said cash from operations, available funds, and financing access were expected to meet cash needs for at least the next 12 months. It anticipated more limited future debt-market funding needs than in prior years and expected to continue significant global content investment, particularly in originals.
COVID-related production disruptions and release delays continued to affect Netflix and third-party suppliers. Delayed releases contributed to content amortization growing more slowly than revenue and therefore to the higher operating margin; this may not represent a durable run rate. The filing also highlights foreign-exchange exposure: 56% of Q1 revenue was denominated in currencies other than the U.S. dollar, and Netflix did not use FX derivatives to hedge these exposures. Legal matters were described as not material individually or in aggregate at the time of filing. Tax examinations were ongoing, and the company said unrecognized tax benefits could change significantly within 12 months, though the possible adjustment range could not be estimated. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether membership additions recover after the pandemic-related year-over-year comparison and how content releases affect growth.
- How much of Q1’s margin and earnings improvement is sustainable versus attributable to content-release timing and the non-cash FX gain.
- Whether content spending and the large content-obligation commitments remain supportable by operating cash flow and liquidity.
- How currency movements affect reported revenue, operating income, debt balances, and earnings.
- Any developments in tax examinations, unrecognized tax benefits, legal contingencies, and execution of the authorized buyback.