Netflix, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone Q4 report; unaudited Q4 results are noted below. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
Netflix operated a global subscription streaming service in more than 190 countries, with over 167 million paid streaming memberships at year-end, plus a legacy U.S. DVD-by-mail service. Its stated strategy is to grow global streaming within its operating-margin objectives, supported by investment in content, technology and international markets. Beginning in Q4 2019, Netflix reported as one global operating segment; management said it now evaluates performance and resource allocation on a consolidated basis, emphasizing global operating margin.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $20.16 billion | $15.79 billion | +28% |
| Operating income | $2.60 billion | $1.61 billion | +62% |
| Operating margin | 13% | 10% | +3 percentage points |
| Net income | $1.87 billion | $1.21 billion | +54% |
| Diluted EPS | $4.13 | $2.68 | +54% |
| Operating cash flow | $(2.89) billion | $(2.68) billion | Greater cash use |
| Free cash flow | $(3.27) billion | $(3.02) billion | Greater cash use |
- Streaming revenue was $19.86 billion, up 29%; DVD revenue was $297 million, down 19%. Cost of revenues was $12.44 billion, or 62% of revenue, compared with 63% in 2018.
- Paid memberships ended the year at 167.09 million, up 20%; net additions were 27.83 million versus 28.62 million in 2018. Average monthly revenue per paying membership rose 5% to $10.82.
- Cash, cash equivalents and short-term investments were $5.02 billion at year-end. Long-term debt, net of issuance costs, was $14.76 billion; senior-note principal was approximately $14.9 billion. Netflix had not drawn on its $750 million revolving credit facility.
- Recognized content liabilities totaled $7.75 billion. Total disclosed streaming content obligations were $19.49 billion, including $11.8 billion not recorded as balance-sheet liabilities at year-end.
- For Q4 2019, unaudited revenue was $5.47 billion and net income was $587 million.
Material changes versus the prior comparable period
- Revenue growth reflected a 23% increase in average paying memberships and a 5% increase in average monthly revenue per membership. Pricing and plan mix contributed to the latter, partly offset by unfavorable foreign exchange.
- Operating margin improved from 10% to 13% as revenue growth outpaced expense growth. Content costs, marketing, technology and development, and general and administrative expenses all increased.
- Content amortization increased by $1.68 billion to $9.22 billion. Cash payments for streaming content assets rose to $14.61 billion, exceeding amortization and contributing substantially to negative cash flow.
- Debt increased by $4.40 billion, net of issuance costs, primarily due to note issuances. Interest expense increased 49% to $626 million.
- Regional growth varied: EMEA and APAC paid net additions increased, while UCAN additions fell 54% to 2.91 million and LATAM additions fell 16% to 5.34 million.
- Netflix adopted lease accounting (ASC 842) in 2019, recognizing right-of-use assets and lease liabilities; the adoption had no material impact on the income statement. It also early adopted updated film and program-content accounting guidance, with no material income-statement impact.
Outlook, commentary, risks and unusual items
- Management expected substantial continued investment in global streaming content, particularly originals, and anticipated negative operating cash flow and negative free cash flow for many years. It expected cash, available funds and financing access to meet needs for at least the next 12 months and anticipated continued debt-market financing.
- Content commitments are multi-year and largely fixed; contractual content obligations due within one year were $8.48 billion. The filing also estimates significant commitments for unknown future titles, potentially $1–$4 billion over the next three years, largely payable after the next 12 months.
- Major risks include intense competition and content-rights availability; member acquisition, retention and pricing; execution and reception of original productions; fixed content costs and cash requirements; access to capital and debt service; foreign-exchange exposure; international regulation and taxation; cybersecurity, privacy and reliance on third-party infrastructure, including AWS.
- Foreign-currency-denominated revenue represented 50% of consolidated revenue. Netflix did not hedge foreign-currency exposures; it estimated 2019 revenue would have been about $762 million higher at prior-year exchange rates.
- The effective tax rate was 9%, compared with 1% in 2018. The filing cites tax-law and structural changes, tax credits and stock-based compensation benefits; Treasury guidance resulted in a Q4 2019 tax adjustment. Gross unrecognized tax benefits were $67 million, and the company could not estimate a reasonably possible adjustment range.
- Content amortization depends on estimated viewing patterns and is identified as a significant judgment and the auditor’s critical audit matter. Actual viewing differing from estimates could change the timing of expense recognition.
- The filing reports ordinary-course litigation and claims but does not identify any matter as material individually or in aggregate at the time. The company stated it was in compliance with debt covenants. No numerical forward financial guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether membership growth, retention, pricing and regional trends support revenue and margin growth, particularly given slower net additions in UCAN and LATAM.
- How content spending, amortization estimates and the $19.49 billion of disclosed content obligations—including off-balance-sheet commitments and unknown future titles—affect cash needs and profitability.
- Debt maturities, interest costs, continued access to financing and liquidity against sustained negative operating cash flow and free cash flow.
- The effect of unhedged currency movements, evolving international regulation and tax examinations on results and cash flows.
- Whether actual viewing patterns and content performance remain consistent with management’s estimates used to amortize the $24.50 billion net content asset balance.