Netflix, Inc. — 2013 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Netflix operated domestic streaming, international streaming, and U.S. DVD-by-mail segments. Its strategy was to grow streaming subscriptions in the U.S. and internationally, expand content—including original programming—and extend service to more devices. At year-end, Netflix reported 44.35 million streaming members in more than 40 countries.
Financial performance and liquidity
- Revenue: $4.375 billion in 2013, up 21% from $3.609 billion in 2012. Fourth-quarter revenue was $1.175 billion, compared with $945.2 million a year earlier.
- Profit: Operating income was $228.3 million, versus $50.0 million in 2012; net income was $112.4 million, versus $17.2 million. Diluted EPS was $1.85, up from $0.29. Approximate operating and net margins were 5.2% and 2.6%, respectively.
- Cash flow: Operating cash flow was $97.8 million, up from $21.6 million. Free cash flow, a company-defined non-GAAP measure, was negative $16.3 million versus negative $58.2 million. Content cash payments exceeded content expense by $230.4 million, a key factor in free cash flow being below net income.
- Liquidity: Cash, cash equivalents, and short-term investments totaled $1.200 billion at year-end, versus $748.1 million in 2012. Working capital was $904.6 million.
- Debt and obligations: Long-term debt was $500 million, consisting of 5.375% senior notes due 2021. Streaming content obligations totaled $7.252 billion, including $4.2 billion not recorded on the balance sheet. Total liabilities were $4.079 billion.
- Segment contribution: Domestic streaming revenue was $2.751 billion and contribution profit $622.8 million (23% margin, up from 17%). International streaming revenue was $712.4 million; contribution loss narrowed to $274.3 million from $389.1 million. DVD revenue fell 20% to $910.8 million; contribution profit was $439.0 million (48% margin).
Material changes versus 2012
- Streaming growth drove consolidated revenue growth: domestic streaming revenue rose 26%, and international streaming revenue rose 148%. Total streaming members increased from 33.27 million to 44.35 million.
- DVD memberships continued to decline: year-end domestic DVD members fell 16% to 6.93 million, while DVD contribution profit decreased 18%.
- Consolidated operating and net income rebounded from 2012, but remained below 2011 levels, when operating income was $376.1 million and net income was $226.1 million.
- Cash and investments increased, supported in part by issuing $500 million of 5.375% notes. Netflix redeemed $200 million of 8.50% notes and recorded a $25.1 million debt-extinguishment loss. The $200 million convertible notes were converted into common shares in 2013.
Outlook, risks, and unusual items
- Management anticipated substantial European expansion in 2014 and a significant increase in original-content investment, while stating that original content would remain less than 10% of global content expense. Netflix planned to obtain approximately $400 million of additional long-term debt in the first quarter of 2014; financing was not assured.
- Management cited fixed, multiyear content commitments and upfront payment requirements as potential pressures on liquidity and margins if membership or revenue growth falls short. Content obligations may include significant amounts for future titles not yet estimable.
- In the third quarter, Netflix changed its estimate for amortizing original content to reflect higher viewing in the first months after release. The change reduced 2013 operating income by $25.0 million and net income by $15.4 million.
- Other key risks include intense competition, member cancellations, content licensing availability and cost, international-market execution, reliance on Amazon Web Services and delivery partners, service or cybersecurity disruptions, and potential network-operator fees or discriminatory practices.
- Netflix disclosed ongoing music-rights negotiations with performing-rights organizations and tax examinations involving federal and California research-and-development credits. Management said the possible loss in shareholder derivative litigation was reasonably possible but not reasonably estimable; the related federal securities class action was dismissed with prejudice, and a motion to reopen was denied in January 2014.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Whether streaming-member growth and domestic streaming contribution margins can continue to offset DVD decline and international losses.
- The timing and cash requirements of the $7.252 billion in streaming-content commitments, including obligations not on the balance sheet and unknown future-title commitments.
- Whether planned 2014 European expansion and content investment, and the proposed additional borrowing, affect liquidity, profitability, or debt levels as expected.
- The ongoing effect of accelerated original-content amortization and whether future viewing patterns support management’s estimates.
- Outcomes of music-rights negotiations, tax examinations, and other legal matters; the filing does not provide a reliable estimate for certain potential exposures.