Netflix, Inc. — FY 2009 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2009; it is not a quarterly filing. Netflix operated a U.S.-only subscription service combining DVD-by-mail with streaming movies and television episodes. It reported 12.268 million total subscribers at year-end, including 11.892 million paid subscribers. More than 48% of subscribers streamed at least 15 minutes of content in Q4.
Financial performance and liquidity
- Revenue: $1.670 billion, up 22.4% from $1.365 billion in 2008. Average paying subscribers increased 26.6%, while average monthly revenue per paying subscriber fell 3.3% to $13.30.
- Profitability: Gross profit was $591.0 million and gross margin was 35.4%, compared with 33.3% in 2008. Operating income was $191.9 million (11.5% margin), versus $121.5 million (8.9%). Net income was $115.9 million, or $1.98 diluted per share, versus $83.0 million, or $1.32 per share.
- Q4 results: Revenue was $444.5 million and net income was $30.9 million. Q4 2008 revenue was $359.6 million and net income was $22.7 million.
- Cash flow: Operating cash flow was $325.1 million, compared with $284.0 million in 2008. Investing activities used $246.1 million, including $193.0 million for content library acquisitions and $45.9 million for property and equipment. Financing activities used $84.6 million, largely reflecting $324.3 million of share repurchases, partly offset by debt proceeds.
- Liquidity: Cash and cash equivalents were $134.2 million, short-term investments $186.0 million, and working capital $184.6 million at year-end. Cash declined $5.7 million during 2009.
- Debt and obligations: Netflix issued $200 million of 8.50% senior notes due 2017; the notes generated approximately $193.9 million of net proceeds. The company also reported $38.0 million of lease financing obligations, including current amounts. Contractual obligations totaled $777.3 million, including $388.1 million of other purchase obligations, primarily content and marketing.
Changes versus prior year
- Revenue growth was driven by subscriber expansion, particularly lower-priced one- and two-DVD plans; average revenue per paying subscriber declined.
- Gross margin improved by 2.1 percentage points, with management citing lower DVD content acquisition costs per disc and lower DVD rentals per subscriber; increased streaming content investment partly offset the improvement.
- Subscriber acquisition cost declined to $25.48 from $29.12. Annualized churn was unchanged at 4.2%.
- Operating cash flow increased, while investing cash use rose to $246.1 million from $145.0 million, including higher DVD acquisitions and less net cash from investment maturities and sales.
- Netflix introduced long-term debt and repurchased $324.3 million of stock in 2009. Stockholders’ equity fell to $199.1 million from $347.2 million.
Outlook, commentary, risks and unusual items
- Management said cash from operations and available funds were expected to meet cash needs for the foreseeable future. It planned a limited international launch of streaming subscriptions in 2010 and expected continued substantial content-library investment, particularly in streaming.
- Management expected stock-based compensation expense to increase significantly in 2010 and future periods because of changes to compensation and employee elections. It cautioned that content spending growth exceeding revenue growth could pressure gross margin.
- Key business risks include intense competition and subscriber churn; dependence on studios for streaming licenses and DVD supply; changing content-release windows; rising content or postage costs; technology, service-provider, privacy and data-security failures; and exposure to legal and intellectual-property claims.
- Material disclosed litigation included a putative subscriber privacy class action, patent infringement cases, and consolidated antitrust litigation involving Netflix and Walmart. The company said it could not reasonably estimate the likelihood or potential amount of adverse outcomes.
- Other notable items: Netflix recognized a $1.8 million pre-tax gain from selling a private-company investment and released $2.1 million of prior litigation-related accruals. A $300 million share-repurchase authorization ran through 2010; $149 million had been repurchased by year-end, with a further $62.4 million purchased afterward. No cash dividends were planned.
- KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls as of year-end.
Most important facts for investors to verify
- Whether subscriber growth and retention can continue to offset lower average revenue per subscriber.
- Whether streaming content costs, licensing terms and expanded viewing will sustain or erode gross margin and cash generation.
- Cash availability after repurchases and content commitments, including the timing and cost of the $200 million notes and lease obligations.
- Developments and potential financial exposure in the privacy, antitrust and patent litigation disclosed in the filing.
- The extent of the expected 2010 increase in stock-based compensation and its effect on reported earnings per share.