Netflix, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Netflix operates Domestic Streaming, International Streaming and Domestic DVD segments. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,984.9 | $2,290.2 | $8,407.0 | $6,353.1 |
| Operating income | $208.6 | $106.0 | $593.4 | $225.9 |
| Operating margin | 7.0% | 4.6% | 7.1% | 3.6% |
| Net income | $129.6 | $51.5 | $373.4 | $119.9 |
| Diluted EPS | $0.29 | $0.12 | $0.84 | $0.27 |
| Operating cash flow | $(419.6) | $(461.9) | $(1,298.0) | $(916.8) |
| Non-GAAP free cash flow | $(464.9) | $(506.4) | $(1,495.9) | $(1,021.1) |
- Q3 revenue rose 30% year over year, driven mainly by international paid-member growth, with higher average revenue per paying membership also contributing. Net income increased 152%; operating income nearly doubled.
- At quarter-end, global streaming memberships were 109.2 million, up 26% year over year. Global average monthly revenue per paying streaming membership was $9.44, up 7%.
- Q3 segment revenue and contribution profit: Domestic Streaming $1,547.2 million and $553.9 million (36% margin); International Streaming $1,327.4 million and $62.4 million (5% margin); Domestic DVD $110.2 million and $63.1 million (57% margin). International contribution profit improved from a $68.6 million loss in Q3 2016.
- For the first nine months, International Streaming generated $3,538.9 million revenue and $91.9 million contribution profit, versus a $242.0 million contribution loss a year earlier. Domestic Streaming’s nine-month contribution margin rose to 38% from 35%.
- Cash and cash equivalents were $1,746.5 million at September 30, 2017, versus $1,467.6 million at December 31, 2016; the company had no short-term investments at quarter-end. Long-term debt, net of issuance costs, was $4,888.8 million, up from $3,364.3 million.
- Current assets were $6,385.3 million and current liabilities $5,310.7 million. Total assets were $16,951.5 million and total liabilities $13,624.2 million.
Material changes and drivers
- Content investment expanded substantially: streaming content assets totaled $13,963.1 million at quarter-end, up from $11,000.8 million at year-end 2016. Nine-month streaming content amortization increased to $4,484.0 million from $3,458.0 million.
- Nine-month operating cash use increased by $381.2 million year over year, primarily because cash payments for streaming content rose $1,605.2 million (33%), alongside higher operating expenses. Revenue growth partly offset the increased spending.
- Netflix issued €1.3 billion of senior notes in May 2017, receiving $1,420.5 million in proceeds. The euro-denominated debt generated foreign-exchange remeasurement losses of $50.8 million in Q3 and $115.1 million for the nine months. Total foreign-exchange losses in interest and other income (expense) were $35.3 million and $84.7 million, respectively.
- Operating expenses increased with investment and expansion: Q3 technology and development expense rose 18%, and general and administrative expense rose 41% year over year. Management cited personnel, content-production support and expanded facilities.
- Domestic DVD memberships continued to decline: 3.6 million at quarter-end, down 16% year over year.
Outlook, risks and unusual items
- Management said it expects significantly higher investment in global streaming content, particularly original content, and negative free cash flow for many years. It expected operating cash flows, available funds and financing access, including its credit facility, to meet cash needs for at least the next 12 months.
- Streaming content obligations totaled $17.0 billion, including $9.6 billion not yet recognized on the balance sheet. Netflix also estimated approximately $3–$5 billion of additional, currently unquantifiable obligations for unknown future titles over the next three years; actual amounts may differ.
- A new $500 million unsecured revolving credit facility was established in July, with an uncommitted option to increase it by up to $250 million. No amounts were drawn at quarter-end. The company reported compliance with debt covenants.
- The Q3 income-tax benefit was $13.4 million, reflecting an effective tax rate of negative 11%. Adoption of share-based compensation accounting guidance produced discrete tax benefits of $41.7 million in Q3 and $110.5 million year to date; management cautioned that this accounting change may increase effective-tax-rate volatility.
- Foreign-exchange movements pose a risk to international revenue and earnings; Netflix reported it did not use foreign-exchange contracts or derivatives to hedge currency exposure. Unfavorable legal outcomes could affect results, though the filing did not identify a specific material legal proceeding. Risk factors were reported as unchanged from the 2016 Form 10-K.
- No numerical forward guidance was provided in the supplied filing text. The U.S. standard and premium plan prices increased in October 2017, after quarter-end, to $10.99 and $13.99 per month, respectively.
Important facts for investors to verify
- Whether membership growth and pricing increases translate into durable revenue and contribution-margin gains, particularly in newer international markets.
- How content commitments, upfront payment timing and original-content spending affect cash burn and the company’s stated expectation of negative free cash flow for years.
- Debt repayment capacity and future financing access, including the effect of foreign-exchange movements on euro-denominated debt and reported earnings.
- The extent and timing of unrecognized content commitments, estimated at $3–$5 billion over three years for unknown future titles, and any changes in tax-audit exposures or unrecognized tax benefits.