EX-99.1 2 nflx-93016xex991.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1
October 17, 2016

Fellow shareholders,

In Q3, quarterly global streaming revenue exceeded $2 billion for the first time (up 36% year over year), helped by our strong content slate including Stranger Things and the second season of Narcos. On a constant currency basis, this represents 39% year-over-year revenue growth, a 400 basis point acceleration from the last two quarters. Our summary results and forecast are below:

 (in millions except per share data and Streaming Content Obligations)
Q3 '15
Q4 '15
Q1 '16
Q2 '16
Q3 '16
Q4 '16 Forecast
Total Streaming:
 
 
 
 
 
 
Revenue
$
1,581

$
1,672

$
1,813

$
1,966

$
2,158

$
2,344

Contribution Profit
$
277

$
270

$
309

$
345

$
407

$
440

Contribution Margin
17.5
 %
16.2
 %
17.0
 %
17.6
 %
18.8
 %
18.8
 %
Paid Memberships
66.02

70.84

77.71

79.90

83.28

87.78

Total Memberships
69.17

74.76

81.50

83.18

86.74

91.94

Net Additions
3.62

5.59

6.74

1.68

3.57

5.20

 
 
 
 
 
 
 
US Streaming:
 
 
 
 
 
 
Revenue
$
1,064

$
1,106

$
1,161

$
1,208

$
1,304

$
1,397

Contribution Profit
$
344

$
379

$
413

$
414

$
475

$
515

Contribution Margin
32.4
 %
34.3
 %
35.5
 %
34.3
 %
36.4
 %
36.9
 %
Paid Memberships
42.07

43.40

45.71

46.00

46.48

47.63

Total Memberships
43.18

44.74

46.97

47.13

47.50

48.95

Net Additions
0.88

1.56

2.23

0.16

0.37

1.45

 
 
 
 
 
 
 
International Streaming:
 
 
 
 
 
 
Revenue
$
517

$
566

$
652

$
758

$
853

$
947

Contribution Profit (Loss)
$
(68
)
$
(109
)
$
(104
)
$
(69
)
$
(69
)
$
(75
)
Contribution Margin
-13.1
 %
-19.2
 %
-16.0
 %
-9.1
 %
-8.0
 %
-7.9
 %
Paid Memberships
23.95

27.44

31.99

33.89

36.80

40.15

Total Memberships
25.99

30.02

34.53

36.05

39.25

43.00

Net Additions
2.74

4.04

4.51

1.52

3.20

3.75

 
 
 
 
 
 
 
Total (including DVD):
 
 
 
 
 
 
Operating Income
$
74

$
60

$
49

$
70

$
106

$
125

Operating Margin
4.2
 %
3.3
 %
2.5
 %
3.3
 %
4.6
 %
5.1
 %
Net Income*
$
29

$
43

$
28

$
41

$
52

$
56

EPS*
$
0.07

$
0.10

$
0.06

$
0.09

$
0.12

$
0.13

 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(196
)
$
(245
)
$
(229
)
$
(226
)
$
(462
)
 
Free Cash Flow
$
(252
)
$
(276
)
$
(261
)
$
(254
)
$
(506
)
 
EBITDA
$
123

$
111

$
107

$
129

$
164

 
Shares (FD)*
437.6

438.3

438.0

438.2

438.4

 
Streaming Content Obligations** ($B)
10.4

10.9

12.3

13.2

14.4

 
* Q4'15 Net income/EPS includes a $13m / $0.03 benefit from a tax accrual release related to resolution of tax audits.
**Corresponds to our total known streaming content obligations as defined in our financial statements and related notes in our most recently filed SEC Form 10-K.

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Q3 Results and Q4 Forecast
Global streaming revenue totaled $2.2 billion, of which 40% was generated abroad. Operating income amounted to $106 million (compared with our $64 million estimate) while net income was $52 million (vs. forecast of $22 million).
In Q3, we added 0.4 million members in the US vs. our forecast of 0.3 million and 3.2 million members internationally vs. our forecast of 2.0 million. Our over-performance against forecast (86.7m total streaming members vs. forecast of 85.5m) was driven primarily by stronger than expected acquisition due to excitement around Netflix original content.
As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy. In Q3, we under forecasted member growth, while in Q2, it was the opposite. For the first nine months of 2016, we’ve added 12 million global members, the same as in the first nine months of 2015.
By the end of Q3’16, we had un-grandfathered 75% of the members that are being un-grandfathered this year and the impact has been consistent with our expectations. ASP grew over 10% year-over-year in both the US and international segments (excluding a $35 million F/X impact). With more revenue, we can reinvest to further improve Netflix to attract new members from around the world, while continuing to delight our existing customers.
Domestically, revenue rose 23% year over year, 480 basis points faster than Q2. US marketing expense rose as a percentage of revenue as we spent to build awareness for our expanding number of original titles. US contribution profit increased 38% year-over-year with contribution margin expanding to 36%, slightly ahead of our 35% forecast.
In the international segment, we exceeded our internal projection for net adds as the acquisition impact of our originals was greater than anticipated across many of our markets. F/X-neutral revenue rose 72% and international contribution loss was flat sequentially at $69 million as content costs came in under our forecast due partly to timing. We are investing in more content across multiple international markets in Q4 and, as a result, we project international contribution loss to grow moderately to $75 million.
In September, we localized Netflix in Poland and Turkey. We began accepting payment in local currency and added a local language user interface, subtitles and dubbing as well as some local content. We have seen nice gains in viewing and retention and we’ll undertake other localization efforts in the coming months and years.
For Q4, we forecast 5.2 million global net adds, with 1.45 million net adds in the US and 3.75 million new members internationally. Our expectation for a moderate year-over-year decline in net adds reflects the completion of un-grandfathering. We are pleased with the results thus far as we expect ASP to grow 12% from Q1’16 to Q4’16. Internationally, the initial demand from our launch in Spain, Portugal and Italy in Q4’15 will also affect our year-over-year net adds comparison.
We will face a tough international net adds comparison in Q1’17 because of the initial membership surge in Q1’16 tied to the launch of 130 additional territories.
As discussed, for the balance of 2016, we will continue to operate around break even, and then start generating material global profits in 2017 and beyond, by marching up operating margins steadily for many years.



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2


Content
We kicked off Q3 with the release of Stranger Things on July 15 to both critical and audience acclaim1. This nostalgic, supernatural thriller proved to be the blockbuster of the summer2 and is the kind of broad appeal, cross demographic, and cross border sensation that we hope will distinguish Netflix original content. Stranger Things is also notable as it is produced and owned by Netflix, which provides us with more attractive economics and greater business and creative control. In August, we launched The Get Down3, a highly stylized drama set in 1970s New York City, detailing the origins of hip-hop. We look forward to releasing part two of season one next year.
Our hit series Narcos returned for season two in September to great success among critics and audiences alike4. Narcos had a positive impact on member acquisition across all of our markets, demonstrating the ability for our tentpole franchises to connect with audiences across the world. We closed the quarter with Marvel’s Luke Cage5, the latest installment in our Marvel series, which will continue with Iron Fist6 on March 17, 2017. We are also looking forward next year to The Defenders7, a team-up of the characters from our first four Marvel series.
We are now in the fourth year of our original content strategy and are pleased with our progress. In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year. The Internet allows us to reach audiences all over the world and, with a growing base of over 86 million members, there’s a large appetite for entertainment and a diversity of tastes to satisfy.
We are fortunate that our Internet-centric, on-demand, subscription-only business model allows us to support programs for both mass and niche audiences alike. Our personalization algorithms help us promote the right content to the right viewers. And since we are not shelf-space constrained nor reliant on advertising, we have the luxury to tell all kinds of stories in less traditional ways. The growth of Internet TV globally has ushered in a new golden age of content, with consumers everywhere enjoying unprecedented access to amazing amounts of high quality programming.
With an expanding content budget (approximately $6 billion in 2017 on a P&L basis), we judge the success of our portfolio of originals in several ways. For each series or film, we measure the impact on acquisition and member engagement which, in turn, is correlated with retention. To determine relative performance, we look at each title’s share of viewing compared with its share of our content budget. We also take into account qualitative factors such as earned media coverage and awards, which enhance our brand and our ability to attract talent for future projects. This year, we are thrilled to have won nine Emmys (out of 54 nominations) across six different shows.
This past quarter, we announced a global pact with 20th Century Fox Studios to license The People vs. O.J. Simpson: American Crime Story and Queen of the South and an agreement with The Walt Disney Co. to license Quantico and American Crime in the US and Canada. We are also increasingly ensuring early financing and sharing windows globally with original broadcasters for series like Star Trek: Discovery from CBS, The Alienist from Paramount TV and the just-launched ABC series Designated Survivor from eOne.

________________________________________
1 http://www.imdb.com/title/tt4574334/?ref_=nv_sr_1
2 https://www.washingtonpost.com/news/arts-and-entertainment/wp/2016/08/18/in-a-dismal-movie-season-netflixs-stranger-things-is-our-great-summer-blockbuster/
3 https://www.rottentomatoes.com/tv/the_get_down/s01/
4 https://www.rottentomatoes.com/tv/narcos/s02/
5 https://www.rottentomatoes.com/tv/luke_cage/s01/
6 https://www.youtube.com/watch?v=0sEJeWB3RA8&feature=youtu.be
7 https://www.youtube.com/watch?v=wBZtM8q2Z1g&feature=youtu.be

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Product and Partnerships
We continue to make progress with our MVPD partnerships. We are excited that the Netflix app will be available across Liberty Global’s footprint8 beginning in the Netherlands later this year and expanding to other countries in 2017. Partnerships like this and our integration on X1 with Comcast9 validate the strength of our content and that we are additive to the current offerings of MVPDs. By working together, MVPDs can sell richer Internet and TV packages, while consumers can more easily sign up for and access Netflix, thus allowing Netflix and our partners to better serve our shared customers.
China
The regulatory environment for foreign digital content services in China has become challenging. We now plan to license content to existing online service providers in China rather than operate our own service in China in the near term. We expect revenue from this licensing will be modest. We still have a long term desire to serve the Chinese people directly, and hope to launch our service in China eventually.
Competition
We face immense competition for consumer screen time. Despite video gaming getting better, video messaging and sharing improving, MVPD UI enhancements, YouTube growth, more SVOD services, and other screen time competitors, Netflix continues to win both time and affection. We presume that Amazon Prime Video will become as global as YouTube and Netflix this fall with the launch of the Jeremy Clarkson show. Our challenge is to continue to improve our service and content so that we better meet consumer desires. Total screen time is quite large and growing as technology and content improve globally.
Free Cash Flow and Capital Structure
In Q3, free cash flow was -$506 million vs. -$254 million in Q2’16 and -$252 million in the year ago quarter. The increase in our free cash flow deficit reflects the growth of original content, which we are increasingly producing and owning (rather than licensing). Self-produced shows like Stranger Things require more cash upfront as we incur spending during the creation of each show prior to its completion and release. In comparison, we generally pay on delivery for licensed originals like Orange is the New Black and we pay over the term of the agreement for licensed non-originals (eg, Scandal).
Over the long run, we believe self-producing is less expensive (including cost of capital) than licensing a series or film, as we work directly with the creative community and eliminate additional overhead and fees. In addition, we own the underlying intellectual property, providing us with global rights and more business and creative control. Combined with the success of our portfolio of originals and the positive impact on our member and revenue growth, we believe this is a wise investment that creates long term value. Consequently, we plan on investing more, which will continue to weigh on free cash flow. We expect Q4’16 FCF to be similar to Q3’16 FCF. Over time, we will be able to fund more of our investment in programming through the growth in operating profit and margin already underway.
Streaming content obligations at quarter end were $14.4 billion, up $1 billion sequentially. The increase reflects the addition of both new original and non-original content to our library as well as expanded rights for our new territories.

________________________________________
8 https://www.libertyglobal.com/pdf/press-release/2016-09-14-Liberty-Global-Lights-Up-TV-Screens-with-Global-Netflix-Partnership-FINAL.pdf
9 http://corporate.comcast.com/comcast-voices/netflix-on-comcast-beta

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4


We finished the quarter with $1.3 billion in cash and equivalents. As we have often done over the past few years, we plan to raise additional debt in the coming weeks. With a debt to total capitalization ratio of about 5%, we remain underleveraged compared both to similar firms and to our view of an efficient capital structure. Our 2025 bonds continue to trade well.10 
  
Reference
For quick reference, our eight most recent investor letters are: July 201611, April 201612, January, 201613, October 201514, July 201515, April 201516, January 201517 October 201418.
 
Conclusion
We have many fantastic titles to enjoy. For investors, though, we’d like to call out the The Crown19. If you appreciated Mad Men, House of Cards and Downton Abbey, we think you will find The Crown extraordinary. It debuts Nov. 4, three Fridays from now.
October 17th, 2016 Earnings Interview
Reed Hastings, David Wells and Ted Sarandos will participate in a live video interview today at 2:00 p.m. Pacific Time at youtube.com/netflixir. The discussion will be moderated by Ben Swinburne, Morgan Stanley and and Scott Devitt, Stifel. Questions that investors would like to see asked should be sent to benjamin.swinburne@morganstanley.com or swdevitt@stifel.com.
    
 
IR Contact: 
PR Contact: 
Spencer Wang
Jonathan Friedland
Vice President, Finance & Investor Relations
Chief Communications Officer
408 809-5360
310 734-2958



________________________________________
10 http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?symbol=NFLX4335215&ticker=C647295
11 http://files.shareholder.com/downloads/NFLX/2457496703x0x900152/4D4F0167-4BE2-4DC1-ACC7-759F1561CD59/Q216LettertoShareholders_FINAL_w_Tables.pdf
12 http://files.shareholder.com/downloads/NFLX/1662264494x0x886428/5FB5A3DF-F23A-4BB1-AC37-583BAEF2A1EE/Q116LettertoShareholders_W_TABLES_.pdf
13 http://files.shareholder.com/downloads/NFLX/1481171463x0x870685/C6213FF9-5498-4084-A0FF-74363CEE35A1/Q4_15_Letter_to_Shareholders_-_COMBINED.pdf
14 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x854558/9B28F30F-BF2F-4C5D-AAFF-AA9AA8F4779D/FINAL_Q3_15_Letter_to_Shareholders_With_Tables_.pdf
15 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x839404/C3CE9EE2-C8F3-40A1-AC9A-FFE0AFA20B21/FINAL_Q2_15_Letter_to_Shareholders_With_Tables_.pdf
16 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x821407/DB785B50-90FE-44DA-9F5B-37DBF0DCD0E1/Q1_15_Earnings_Letter_final_tables.pdf
17 http://files.shareholder.com/downloads/NFLX/4124769775x7871834x804108/043a3015-36ec-49b9-907c-27960f1a7e57/Q4_14_Letter_to_shareholders.pdf
18 http://files.shareholder.com/downloads/NFLX/3754169286x0x786677/6974d8e9-5cb3-4009-97b1-9d4a5953a6a5/Q3_14_Letter_to_shareholders.pdf
19 https://www.youtube.com/watch?v=JWtnJjn6ng0&feature=youtu.be

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Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-­GAAP financial measures of net income on a pro forma basis excluding the release of tax reserves, revenue and ASP growth on a constant currency basis, free cash flow and EBITDA. Management believes that the non­-GAAP measure of net income on a pro forma basis excluding the release of tax reserves provides useful information as this measure excludes effects that are not indicative of our core operating results. Management believes that the non-GAAP financial measures of revenue and ASP growth on a constant currency basis are useful in assessing underlying business performance excluding the effect of foreign currency rate fluctuations. Management believes that free cash flow and EBITDA are important liquidity metrics because they measure, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certain other activities or the amount of cash used in operations, including investments in global streaming content. However, these non-­GAAP measures should be considered in addition to, not as a substitute for or superior to, net income, revenue, operating income, diluted earnings per share and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of these non­-GAAP measures are contained in tabular form on the attached unaudited financial statements.
Forward-Looking Statements
This shareholder letter contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding content investments; localization efforts; ASP; profitability in 2017 and beyond; content releases and programming hours; our content budget; MVPD partnerships; business plans for China; future capital raises and timing of such raises; domestic and international net additions, and total and paid subscribers; revenue; contribution profit (loss) and contribution margin for both domestic (streaming and DVD) and international operations, as well as consolidated operating income and margin, net income, earnings per share and free cash flow. The forward-looking statements in this letter are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for streaming; fluctuations in consumer usage of our service; service disruptions; production risks; actions of Internet Service Providers; and, competition, including consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 28, 2016. The Company provides internal forecast numbers. Investors should anticipate that actual performance will vary from these forecast numbers based on risks and uncertainties discussed above and in our Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this shareholder letter.



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6



Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Revenues
$
2,290,188

 
$
2,105,204

 
$
1,738,355

 
$
6,353,128

 
$
4,956,178

Cost of revenues
1,532,844

 
1,473,098

 
1,173,958

 
4,375,482

 
3,342,111

Marketing
282,043

 
216,029

 
208,102

 
706,082

 
599,919

Technology and development
216,099

 
207,300

 
171,762

 
626,907

 
469,929

General and administrative
153,166

 
138,407

 
110,892

 
418,798

 
298,287

Operating income
106,036

 
70,370

 
73,641

 
225,859

 
245,932

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(35,536
)
 
(35,455
)
 
(35,333
)
 
(106,528
)
 
(97,287
)
Interest and other income (expense)
8,627

 
16,317

 
3,930

 
50,907

 
(27,491
)
Income before income taxes
79,127

 
51,232

 
42,238

 
170,238

 
121,154

 Provision for income taxes
27,610

 
10,477

 
12,806

 
50,308

 
41,691

Net income
$
51,517

 
$
40,755

 
$
29,432

 
$
119,930

 
$
79,463

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.10

 
$
0.07

 
$
0.28

 
$
0.19

Diluted
$
0.12

 
$
0.09

 
$
0.07

 
$
0.27

 
$
0.18

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
428,937

 
428,483

 
426,869

 
428,514

 
425,289

Diluted
438,389

 
438,154

 
437,606

 
438,180

 
435,849




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7




Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
 
 
As of
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
969,158

 
$
1,809,330

Short-term investments
374,098

 
501,385

Current content assets, net
3,632,399

 
2,905,998

Other current assets
218,238

 
215,127

Total current assets
5,193,893

 
5,431,840

Non-current content assets, net
6,677,674

 
4,312,817

Property and equipment, net
191,876

 
173,412

Other non-current assets
283,895

 
284,802

Total assets
$
12,347,338

 
$
10,202,871

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
3,497,214

 
$
2,789,023

Accounts payable
285,753

 
253,491

Accrued expenses
201,232

 
140,389

Deferred revenue
427,206

 
346,721

Total current liabilities
4,411,405

 
3,529,624

Non-current content liabilities
2,975,189

 
2,026,360

Long-term debt
2,373,966

 
2,371,362

Other non-current liabilities
57,812

 
52,099

Total liabilities
9,818,372

 
7,979,445

Stockholders' equity:
 
 
 
Common stock
1,503,641

 
1,324,809

Accumulated other comprehensive loss
(36,530
)
 
(43,308
)
Retained earnings
1,061,855

 
941,925

Total stockholders' equity
2,528,966

 
2,223,426

Total liabilities and stockholders' equity
$
12,347,338

 
$
10,202,871

 


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Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2016

June 30,
2016

September 30,
2015

September 30,
2016

September 30,
2015
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income
$
51,517

 
$
40,755

 
$
29,432

 
$
119,930

 
$
79,463

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
Additions to streaming content assets
(2,442,080
)
 
(1,791,766
)
 
(1,304,466
)
 
(6,550,445
)
 
(4,221,326
)
Change in streaming content liabilities
529,885

 
238,517

 
104,684

 
1,674,125

 
922,163

Amortization of streaming content assets
1,224,108

 
1,175,361

 
871,403

 
3,457,990

 
2,443,521

Amortization of DVD content assets
19,284

 
20,021

 
18,589

 
59,746

 
60,587

Depreciation and amortization of property, equipment and intangibles
14,410

 
14,131

 
16,047

 
43,339

 
46,795

Stock-based compensation expense
43,495

 
44,112

 
32,834

 
130,029

 
88,865

Excess tax benefits from stock-based compensation
(12,762
)
 
(13,323
)
 
(37,726
)
 
(37,401
)
 
(106,154
)
Other non-cash items
9,682

 
9,040

 
10,866

 
31,479

 
23,854

Deferred taxes
14,338

 
(17,876
)
 
(29,417
)
 
(20,141
)
 
(70,691
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Other current assets
10,250

 
24,091

 
66,695

 
48,649

 
81,448

Accounts payable
27,810

 
8,795

 
6,762

 
16,707

 
2,584

Accrued expenses
28,957

 
2,099

 
10,883

 
72,288

 
88,429

Deferred revenue
30,230

 
22,753

 
27,985

 
80,485

 
55,153

Other non-current assets and liabilities
(11,065
)
 
(3,003
)
 
(20,540
)
 
(43,604
)
 
615

Net cash used in operating activities
(461,941
)
 
(226,293
)
 
(195,969
)
 
(916,824
)
 
(504,694
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of DVD content assets
(17,249
)
 
(17,924
)
 
(14,467
)
 
(58,380
)
 
(57,159
)
Purchases of property and equipment
(27,366
)
 
(10,814
)
 
(37,820
)
 
(46,605
)
 
(78,394
)
Change in other assets
125

 
907

 
(3,760
)
 
676

 
(4,174
)
Purchases of short-term investments
(128,136
)
 
(18,492
)
 
(66,444
)
 
(181,590
)
 
(225,333
)
Proceeds from sale of short-term investments
171,747

 
18,752

 
43,887

 
198,687

 
144,247

Proceeds from maturities of short-term investments
24,855

 
24,675

 
31,125

 
112,555

 
82,182

Net cash provided by (used in) investing activities
23,976

 
(2,896
)
 
(47,479
)
 
25,343

 
(138,631
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
3,819

 
4,232

 
35,089

 
11,587

 
69,809

Proceeds from issuance of debt

 

 

 

 
1,500,000

Issuance costs

 

 

 

 
(17,629
)
Excess tax benefits from stock-based compensation
12,762

 
13,323

 
37,726

 
37,401

 
106,154

Other financing activities
58

 
57

 
(61
)
 
170

 
(599
)
Net cash provided by financing activities
16,639

 
17,612

 
72,754

 
49,158

 
1,657,735

 Effect of exchange rate changes on cash and cash equivalents
(441
)
 
(2,742
)
 
(7,741
)
 
2,151

 
(12,581
)
 Net (decrease) increase in cash and cash equivalents
(421,767
)
 
(214,319
)
 
(178,435
)
 
(840,172
)
 
1,001,829

 Cash and cash equivalents, beginning of period
1,390,925

 
1,605,244

 
2,293,872

 
1,809,330

 
1,113,608

 Cash and cash equivalents, end of period
$
969,158

 
$
1,390,925

 
$
2,115,437

 
$
969,158

 
$
2,115,437

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Non-GAAP free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
$
(461,941
)
 
$
(226,293
)
 
$
(195,969
)
 
$
(916,824
)
 
$
(504,694
)
Acquisition of DVD content assets
(17,249
)
 
(17,924
)
 
(14,467
)
 
(58,380
)
 
(57,159
)
Purchases of property and equipment
(27,366
)
 
(10,814
)
 
(37,820
)
 
(46,605
)
 
(78,394
)
Change in other assets
125

 
907

 
(3,760
)
 
676

 
(4,174
)
Non-GAAP free cash flow
$
(506,431
)
 
$
(254,124
)
 
$
(252,016
)
 
$
(1,021,133
)
 
$
(644,421
)

NOTE - Certain prior year amounts have been reclassified to conform to the current year presentation.

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9



Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
 
As of / Three Months Ended
 
As of/ Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Domestic Streaming
 
 
 
 
 
 
 
 
 
Total memberships at end of period
47,497

 
47,129

 
43,181

 
47,497

 
43,181

Paid memberships at end of period
46,479

 
46,004

 
42,068

 
46,479

 
42,068

 
 
 
 
 
 
 
 
 
 
Revenues
$
1,304,333

 
$
1,208,271

 
$
1,063,961

 
$
3,673,845

 
$
3,074,406

Cost of revenues
720,658

 
707,106

 
644,914

 
2,094,310

 
1,840,134

Marketing
108,495

 
86,806

 
74,835

 
277,243

 
237,813

Contribution profit
475,180

 
414,359

 
344,212

 
1,302,292

 
996,459

 
 
 
 
 
 
 
 
 
 
International Streaming
 
 
 
 
 
 
 
 
 
Total memberships at end of period
39,246

 
36,048

 
25,987

 
39,246

 
25,987

Paid memberships at end of period
36,799

 
33,892

 
23,951

 
36,799

 
23,951

 
 
 
 
 
 
 
 
 
 
Revenues
$
853,480

 
$
758,201

 
$
516,870

 
$
2,263,429

 
$
1,387,030

Cost of revenues
748,515

 
698,162

 
451,251

 
2,076,576

 
1,249,495

Marketing
173,548

 
129,223

 
133,267

 
428,839

 
362,106

Contribution profit (loss)
(68,583
)
 
(69,184
)
 
(67,648
)
 
(241,986
)
 
(224,571
)
 
 
 
 
 
 
 
 
 
 
Domestic DVD
 
 
 
 
 
 
 
 
 
Total memberships at end of period
4,273

 
4,530

 
5,060

 
4,273

 
5,060

Paid memberships at end of period
4,194

 
4,435

 
4,971

 
4,194

 
4,971

 
 
 
 
 
 
 
 
 
 
Revenues
$
132,375

 
$
138,732

 
$
157,524

 
$
415,854

 
$
494,742

Cost of revenues
63,671

 
67,830

 
77,793

 
204,596

 
252,482

Contribution profit
68,704

 
70,902

 
79,731

 
211,258

 
242,260

 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
2,290,188

 
$
2,105,204

 
$
1,738,355

 
$
6,353,128

 
$
4,956,178

Cost of revenues
1,532,844

 
1,473,098

 
1,173,958

 
4,375,482

 
3,342,111

Marketing
282,043

 
216,029

 
208,102

 
706,082

 
599,919

Contribution profit
475,301

 
416,077

 
356,295

 
1,271,564

 
1,014,148

Other operating expenses
369,265

 
345,707

 
282,654

 
1,045,705

 
768,216

Operating income
106,036

 
70,370

 
73,641

 
225,859

 
245,932

Other income (expense)
(26,909
)
 
(19,138
)
 
(31,403
)
 
(55,621
)
 
(124,778
)
Provision for income taxes
27,610

 
10,477

 
12,806

 
50,308

 
41,691

Net income
$
51,517

 
$
40,755

 
$
29,432

 
$
119,930

 
$
79,463





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10


Netflix, Inc.
Non-GAAP Information
(unaudited)
(in thousands, except per share data)

 
Three Months Ended
 
September 30,
2015
 
December 31,
2015
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
Non-GAAP Adjusted EBITDA reconciliation:
 
 
 
 
 
 
 
 
 
GAAP net income
$
29,432

 
$
43,178

 
$
27,658

 
$
40,755

 
$
51,517

Add:
 
 
 
 
 
 
 
 
 
Interest and other (income) expense
31,403

 
39,163

 
9,574

 
19,138

 
26,909

Provision (benefit) for income taxes
12,806

 
(22,447
)
 
12,221

 
10,477

 
27,610

Depreciation and amortization of property, equipment and intangibles
16,047

 
15,488

 
14,798

 
14,131

 
14,410

Stock-based compensation expense
32,834

 
35,860

 
42,422

 
44,112

 
43,495

Adjusted EBITDA
$
122,522

 
$
111,242

 
$
106,673

 
$
128,613

 
$
163,941



 
As Reported
 
Currency Translation Adjustment
 
Adjusted revenue at 2015 rates
 
Reported Change
 
Constant Currency Change
Non-GAAP reconciliation of reported and constant currency revenue growth for the quarter ended September 30, 2016:
 
 
Global streaming revenue
$
2,157,813

 
$
34,887

 
$
2,192,700

 
36
%
 
39
%
International streaming revenue
853,480

 
34,887

 
888,367

 
65
%
 
72
%


 
 
Three Months Ended
 
 
December 31,
2015
Non-GAAP net income reconciliation:
 
 
GAAP net income
 
$
43,178

Less: Release of tax accrual
 
(13,438
)
Non-GAAP net income
 
$
29,740

Non-GAAP earnings per share:
 
 
Basic
 
$
0.07

Diluted
 
$
0.07

Weighted-average common shares outstanding:
 
 
Basic
 
427,668

Diluted
 
438,257



nflxlogo2015a07.jpg
11