Netflix, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The unaudited filing covers Netflix’s U.S. subscription business, combining streaming movies and TV episodes with DVDs by mail. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $493.7 million | $394.1 million | +25.3% |
| Gross profit / margin | $186.5 million / 37.8% | $134.8 million / 34.2% | Margin +3.6 percentage points |
| Operating income / margin | $58.3 million / 11.8% | $36.5 million / 9.2% | |
| Net income | $32.3 million | $22.4 million | +44.3% |
| Diluted EPS | $0.59 | $0.37 | +59.5% |
| Cash from operations | $75.4 million | $65.6 million |
- Revenue growth was driven by a 32.3% increase in average paying subscribers to 12.76 million. Average monthly revenue per paying subscriber declined 5.4% to $12.90, primarily due to growth in lower-priced plans.
- At quarter end, total subscribers were 13.97 million, including 13.62 million paid subscribers. Churn was 3.8%, compared with 4.2% a year earlier; subscriber acquisition cost fell 16.5% to $21.54.
- Cost of subscription revenue rose 19.4%, slower than revenue growth; fulfillment expense increased 13.8%. Technology and development expense rose 54.5% to $37.4 million, while marketing increased 20.8% to $75.2 million.
Cash, liquidity and debt
- At March 31, 2010, cash and cash equivalents were $79.9 million and short-term investments were $186.5 million. Current assets were $379.5 million versus current liabilities of $243.4 million.
- Operating cash flow was $75.4 million; investing activities used $39.0 million and financing activities used $90.7 million. Cash decreased by $54.4 million during the quarter.
- Financing outflow included $107.7 million of stock repurchases. The company repurchased 1.67 million shares at an average $64.51 per share; $43.2 million remained under its $300 million authorization at quarter end.
- Long-term debt was $200 million: 8.50% senior notes due in 2017. Netflix reported compliance with the notes’ covenants. Lease financing obligations totaled $37.6 million, including current and long-term portions.
Material changes, outlook and risks
- Year over year, gross margin improved from 34.2% to 37.8%, primarily due to lower DVD content acquisition costs per disc and fewer monthly DVD rentals per average paying subscriber; increased streaming-content investment partly offset the improvement. Compared with Q4 2009, gross margin declined 0.2 percentage points.
- Management expected lower average monthly revenue per subscriber to continue until new subscribers’ average plan price converges with that of existing subscribers. It warned that content investment—particularly streaming—could reduce gross margin if spending grows faster than revenue.
- The company planned a limited international launch of streaming subscriptions in the second half of 2010. Management expected operating cash flows and available funds to meet cash needs for the foreseeable future, while noting additional financing could be required or chosen.
- Streaming-content license commitments that did not meet asset-recognition criteria were $179.1 million. Total contractual obligations were $903.9 million, including $492.2 million of other purchase obligations, primarily content-related and marketing commitments.
- Risks included uncertain negotiations with performing rights organizations over music royalties and possible related litigation; several patent and antitrust cases; and uncertainty in management estimates, including content-library lives and royalties. A subscriber privacy class action and a patent case were dismissed or settled during the quarter; other matters remained pending. The filing states there were no material changes to previously disclosed risk factors.
- Management described DVD as likely to remain the primary viewing method for most subscribers for the foreseeable future, while expecting Internet delivery eventually to surpass DVD. The filing provides no quantified full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether subscriber growth and lower churn can offset the continued decline in average revenue per paying subscriber.
- Whether streaming-content costs and investment commitments can be absorbed without sustained gross-margin pressure.
- Cash available after repurchases, content obligations and debt service, and the company’s ability to meet contractual commitments.
- Developments in music-royalty negotiations, patent and antitrust litigation, and related potential costs or liabilities.