UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 001-35727

Netflix, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	77-0467272
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

100 Winchester Circle, Los Gatos, California 95032

(Address and zip code of principal executive offices)

(408) 540-3700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
			Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of June 30, 2018, there were 435,457,505 shares of the registrant’s common stock, par value $0.001, outstanding.

Table of Contents

		Page
	Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Cash Flows	5
	Consolidated Balance Sheets	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
	Part II. Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 6.	Exhibits	34
Signatures		35
Exhibit Index		36

2

NETFLIX, INC.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Revenues	$	3,907,270		$	2,785,464		$	7,608,126		$	5,422,099
Cost of revenues	2,289,867			1,902,308			4,485,942			3,559,332
Marketing	526,780			274,323			1,006,002			545,593
Technology and development	317,213			267,083			617,943			524,191
General and administrative	311,197			213,943			589,448			408,234
Operating income	462,213			127,807			908,791			384,749
Other income (expense):
Interest expense	(101,605		)	(55,482		)	(182,824		)	(102,224		)
Interest and other income (expense)	68,028			(58,363		)	2,285			(44,771		)
Income before income taxes	428,636			13,962			728,252			237,754
Provision for (benefit from) income taxes	44,287			(51,638		)	53,779			(6,068		)
Net income	$	384,349		$	65,600		$	674,473		$	243,822
Earnings per share:
Basic	$	0.88		$	0.15		$	1.55		$	0.57
Diluted	$	0.85		$	0.15		$	1.50		$	0.55
Weighted-average common shares outstanding:
Basic	435,097			431,396			434,638			431,000
Diluted	451,552			446,262			450,958			445,862

See accompanying notes to the consolidated financial statements.

3

NETFLIX, INC.

Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)

	Three Months Ended					Six Months Ended
	June 30, 2018			June 30, 2017		June 30, 2018		June 30, 2017
Net income	$	384,349		$	65,600	$	674,473	$	243,822
Other comprehensive income:
Foreign currency translation adjustments	(16,691		)	14,347		8,130		16,926
Change in unrealized gains on available-for-sale securities, net of tax of $0, $89, $0, and $166, respectively	—			144		—		271
Total other comprehensive income (loss)	(16,691		)	14,491		8,130		17,197
Comprehensive income	$	367,658		$	80,091	$	682,603	$	261,019

See accompanying notes to the consolidated financial statements.

4

NETFLIX, INC.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Cash flows from operating activities:
Net income	$	384,349		$	65,600		$	674,473		$	243,822
Adjustments to reconcile net income to net cash used in operating activities:
Additions to streaming content assets	(3,033,721		)	(2,664,421		)	(6,020,468		)	(5,013,087		)
Change in streaming content liabilities	288,474			514,890			667,359			881,147
Amortization of streaming content assets	1,817,817			1,550,794			3,566,661			2,856,477
Amortization of DVD content assets	11,154			16,511			22,288			35,109
Depreciation and amortization of property, equipment and intangibles	19,736			18,551			38,777			33,600
Stock-based compensation expense	81,232			44,028			149,627			88,916
Other non-cash items	13,921			11,519			22,130			33,185
Foreign currency remeasurement loss (gain) on long-term debt	(85,410		)	64,220			(44,330		)	64,220
Deferred taxes	(9,539		)	(20,702		)	(31,588		)	(47,466		)
Changes in operating assets and liabilities:
Other current assets	(25,564		)	(80,199		)	(81,469		)	(105,601		)
Accounts payable	7,733			(12,439		)	81,816			(23,439		)
Accrued expenses	(52,851		)	(48,042		)	66,198			45,500
Deferred revenue	23,848			46,609			79,118			61,830
Other non-current assets and liabilities	40,582			(41,447		)	54,412			(32,597		)
Net cash used in operating activities	(518,239		)	(534,528		)	(754,996		)	(878,384		)
Cash flows from investing activities:
Acquisition of DVD content assets	(12,552		)	(7,624		)	(23,348		)	(32,996		)
Purchases of property and equipment	(27,323		)	(65,231		)	(64,493		)	(117,754		)
Change in other assets	(441		)	(1,064		)	(2,227		)	(1,833		)
Purchases of short-term investments	—			(14,246		)	—			(72,020		)
Proceeds from sale of short-term investments	—			14,128			—			69,876
Proceeds from maturities of short-term investments	—			17,605			—			22,705
Net cash used in investing activities	(40,316		)	(56,432		)	(90,068		)	(132,022		)
Cash flows from financing activities:
Proceeds from issuance of debt	1,900,000			1,420,510			1,900,000			1,420,510
Debt issuance costs	(16,992		)	(15,013		)	(16,992		)	(15,013		)
Proceeds from issuance of common stock	26,936			14,826			83,271			39,004
Other financing activities	(532		)	63			(853		)	124
Net cash provided by financing activities	1,909,412			1,420,386			1,965,426			1,444,625
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(36,340		)	11,527			(29,163		)	16,982
Net increase in cash, cash equivalents, and restricted cash	1,314,517			840,953			1,091,199			451,201
Cash, cash equivalents, and restricted cash at beginning of period	2,599,477			1,077,824			2,822,795			1,467,576
Cash, cash equivalents, and restricted cash at end of period	$	3,913,994		$	1,918,777		$	3,913,994		$	1,918,777
Supplemental disclosure:
Increase (decrease) in investing activities included in liabilities	$	725		$	(3,493	)	$	4,642		$	(20,165	)

See accompanying notes to the consolidated financial statements.

5

NETFLIX, INC.

Consolidated Balance Sheets

(in thousands, except share and par value data)

	As of
	June 30, 2018			December 31, 2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,906,357		$	2,822,795
Current content assets, net	4,803,663			4,310,934
Other current assets	636,869			536,245
Total current assets	9,346,889			7,669,974
Non-current content assets, net	12,292,070			10,371,055
Property and equipment, net	349,646			319,404
Other non-current assets	674,932			652,309
Total assets	$	22,663,537		$	19,012,742
Liabilities and Stockholders’ Equity
Current liabilities:
Current content liabilities	$	4,541,087		$	4,173,041
Accounts payable	448,219			359,555
Accrued expenses	392,595			315,094
Deferred revenue	697,740			618,622
Total current liabilities	6,079,641			5,466,312
Non-current content liabilities	3,604,158			3,329,796
Long-term debt	8,342,067			6,499,432
Other non-current liabilities	141,071			135,246
Total liabilities	18,166,937			15,430,786
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common stock, $0.001 par value; 4,990,000,000 shares authorized at June 30, 2018 and December 31, 2017; 435,457,505 and 433,392,686 issued and outstanding at June 30, 2018 and December 31, 2017, respectively	2,103,437			1,871,396
Accumulated other comprehensive loss	(12,427		)	(20,557		)
Retained earnings	2,405,590			1,731,117
Total stockholders’ equity	4,496,600			3,581,956
Total liabilities and stockholders’ equity	$	22,663,537		$	19,012,742

See accompanying notes to the consolidated financial statements.

6

NETFLIX, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim consolidated financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”) on February 5, 2018. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the streaming content asset amortization policy and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.

The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2017. Interim results are not necessarily indicative of the results for a full year.

The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD, all of which derive revenue from monthly membership fees. See Note 10 for further detail on the Company's segments.

There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting pronouncements below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017.

Recently adopted accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The Company adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. Because the Company's primary source of revenues is from monthly membership fees which are recognized ratably over each monthly membership period, the impact on its consolidated financial statements is not material.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company adopted ASU 2016-18 in the first quarter of 2018 and the impact on its consolidated financial statements is not material as the Company's restricted cash balances are immaterial.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Act”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In the first quarter of 2018, the Company elected to treat any potential GILTI inclusions as a period cost.

Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019 and is in the process of implementing changes to its systems and processes in conjunction with its review of lease agreements. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company's balance sheet for real estate operating leases.

7

2. Earnings Per Share

Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
	(in thousands, except per share data)
Basic earnings per share:
Net income	$	384,349	$	65,600	$	674,473	$	243,822
Shares used in computation:
Weighted-average common shares outstanding	435,097		431,396		434,638		431,000
Basic earnings per share	$	0.88	$	0.15	$	1.55	$	0.57
Diluted earnings per share:
Net income	$	384,349	$	65,600	$	674,473	$	243,822
Shares used in computation:
Weighted-average common shares outstanding	435,097		431,396		434,638		431,000
Employee stock options	16,455		14,866		16,320		14,862
Weighted-average number of shares	451,552		446,262		450,958		445,862
Diluted earnings per share	$	0.85	$	0.15	$	1.50	$	0.55

Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. These anti-dilutive stock options were immaterial for each period presented.

8

3. Cash, Cash Equivalents and Restricted Cash

	As of June 30, 2018
	Cash and cash equivalents		Non-current Assets (1)
	(in thousands)
Cash	$	2,232,132	$	6,351
Level 1 securities:
Money market funds	1,524,225		1,286
Level 2 securities:
Time Deposits	150,000		—

	As of December 31, 2017
	Cash and cash equivalents		Non-current Assets (1)
	(in thousands)
Cash	$	2,072,296	$	4,367
Level 1 securities:
Money market funds	449,734		1,276
Level 2 securities:
Time Deposits	300,765		—

(1) Restricted cash related to workers compensation deposits and letter of credit agreements. Balance as of June 30, 2018 is included in cash, cash equivalents, and restricted cash on the Consolidated Statements of Cash Flows.

There were no material gross realized gains or losses in the three and six months ended June 30, 2018 and 2017, respectively.

4. Balance Sheet Components

Content Assets

Content assets consisted of the following:

	As of
	June 30, 2018		December 31, 2017
	(in thousands)
Licensed content, net	$	13,032,400	$	11,771,778
Produced content, net
Released, less amortization	1,786,221		1,427,256
In production	2,085,501		1,311,137
In development and pre-production	179,060		158,517
	4,050,782		2,896,910
DVD, net	12,551		13,301
Total	$	17,095,733	$	14,681,989
Current content assets, net	$	4,803,663	$	4,310,934
Non-current content assets, net	$	12,292,070	$	10,371,055

On average, over 90% of a licensed or produced streaming content asset is expected to be amortized within four years after its month of first availability.

9

As of June 30, 2018, over 30% of the $17.1 billion unamortized cost is expected to be amortized within one year and 30% and 81%  of the $1.8 billion unamortized cost of the produced content that has been released is expected to be amortized within one year and three years, respectively.

As of June 30, 2018, the amount of accrued participations and residuals was not material.

Property and Equipment, Net

Property and equipment and accumulated depreciation consisted of the following:

	As of
	June 30, 2018			December 31, 2017			Estimated Useful Lives
	(in thousands)
Information technology	$	215,298		$	223,850		3 years
Furniture and fixtures	50,513			49,217			3 years
Buildings	40,681			40,681			30 years
Leasehold improvements	237,944			229,848			Over life of lease
DVD operations equipment	58,666			59,316			5 years
Corporate aircraft	57,938			30,039			8 years
Capital work-in-progress	28,902			8,267
Property and equipment, gross	689,942			641,218
Less: Accumulated depreciation	(340,296		)	(321,814		)
Property and equipment, net	$	349,646		$	319,404

10

Deferred Revenue

The Company’s primary source of revenues are from monthly membership fees. Members are billed in advance of the start of their monthly membership and revenues are recognized ratably over each monthly membership period. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities. The Company is the principal in all its relationships where partners, including consumer electronics (“CE”) manufacturers, multichannel video programming distributors (“MVPDs”), mobile operators and internet service providers (“ISPs”), provide access to the service as the Company retains control over service delivery to its members. Typically, payments made to the partners, such as for marketing, are expensed, but in the case where the price that the member pays is established by the partners and there is no standalone price for the Netflix service (for instance, in a bundle), these payments are recognized as a reduction of revenues.

Deferred revenue consists of membership fees billed that have not been recognized, as well as gift and other prepaid memberships that have not been fully redeemed. As of June 30, 2018, total deferred revenue was $697.7 million, the vast majority of which was related to membership fees billed that are expected to be recognized as revenue within the next month. The remaining deferred revenue balance, which is related to gift cards and other prepaid memberships, will be recognized as revenue over the period of service after redemption, which is expected to occur over the next 12 months. The $79.1 million increase in deferred revenue as compared to the year ended December 31, 2017 is a result of the increase in membership fees billed due to increased members and average monthly revenue per paying member.

5. Long-term Debt

As of June 30, 2018, the Company had aggregate outstanding long-term notes of $8,342.1 million, net of $74.9 million of issuance costs, with varying maturities (the "Notes"). Each of the Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at fixed rates.

The following table provides a summary of the Company's outstanding long-term debt and the fair values based on quoted market prices in less active markets as of June 30, 2018 and December 31, 2017:

						Level 2 Fair Value as of
	Principal Amount at Par		Issuance Date	Maturity	Interest Payment Dates	June 30, 2018		December 31, 2017
	(in millions)					(in millions)
5.375% Senior Notes	$	500	February 2013	February 2021	February 1 and August 1	$	516	$	530
5.750% Senior Notes	400		February 2014	March 2024	March 1 and September 1	411		427
5.875% Senior Notes	800		February 2015	February 2025	April 15 and October 15	822		856
5.50% Senior Notes	700		February 2015	February 2022	April 15 and October 15	723		739
4.375% Senior Notes	1,000		October 2016	November 2026	May 15 and November 15	942		983
3.625% Senior Notes (1)	1,517		May 2017	May 2027	May 15 and November 15	1,491		1,575
4.875% Senior Notes	1,600		October 2017	April 2028	April 15 and October 15	1,526		1,571
5.875% Senior Notes	$	1,900	April 2018	November 2028	May 15 and November 15	1,923		—
	$	8,417

(1) Debt is denominated in euro with a €1,300 million aggregate principal amount and is remeasured into U.S. dollars at each balance sheet date.

The expected timing of principal and interest payments for these Notes are as follows:

11

	As of
	June 30, 2018		December 31, 2017
	(in thousands)
Less than one year	$	429,942	$	311,339
Due after one year and through three years	1,347,480		627,444
Due after three years and through five years	1,448,814		1,761,465
Due after five years	8,687,586		6,348,580
Total debt obligations	$	11,913,822	$	9,048,828

Each of the Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. The Company may redeem the Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest and an applicable premium. The Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of certain of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. As of June 30, 2018 and December 31, 2017, the Company was in compliance with all related covenants.

Revolving Credit Facility

In July 2017, the Company entered into a $500.0 million unsecured revolving credit facility (“Revolving Credit Agreement”), with an uncommitted incremental facility to increase the amount of the revolving credit facility by up to an additional $250.0 million, subject to certain terms and conditions. Revolving loans may be borrowed, repaid and reborrowed until July 27, 2022, at which time all amounts borrowed must be repaid. The Company may use the proceeds of future borrowings under the Revolving Credit Agreement for working capital and general corporate purposes. As of June 30, 2018, no amounts have been borrowed under the Revolving Credit Agreement.

The borrowings under the Revolving Credit Agreement bear interest, at the Company’s option, of either (i) a floating rate equal to a base rate (the “Alternate Base Rate”) or (ii) a rate equal to an adjusted London interbank offered rate (the “Adjusted LIBO Rate”), plus a margin of 0.75%. The Alternate Base Rate is defined as the greatest of (A) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate, (B) the federal funds rate, plus 0.500% and (C) the Adjusted LIBO Rate for a one-month interest period, plus 1.00%. The Adjusted LIBO Rate is defined as the London interbank offered rate for deposits in U.S. dollars, for the relevant interest period, adjusted for statutory reserve requirements, but in no event shall the Adjusted LIBO Rate be less than 0.00% per annum.

The Company is also obligated to pay a commitment fee on the undrawn amounts of the Revolving Credit Agreement at a rate of 0.10%. The Revolving Credit Agreement requires the Company to comply with certain covenants, including covenants that limit or restrict the ability of the Company’s subsidiaries to incur debt and limit or restrict the ability of the Company and its subsidiaries to grant liens and enter into sale and leaseback transactions; and, in the case of the Company or a guarantor, merge, consolidate, liquidate, dissolve or sell, transfer, lease or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole. As of June 30, 2018, the Company was in compliance with all related covenants.

6. Commitments and Contingencies

Streaming Content

As of June 30, 2018, the Company had $18.4 billion of obligations comprised of $4.5 billion included in "Current content liabilities" and$3.6 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $10.3 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.

As of December 31, 2017, the Company had $17.7 billion of obligations comprised of $4.2 billion included in "Current content liabilities" and $3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $10.2 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.

The expected timing of payments for these streaming content obligations is as follows:

12

	As of
	June 30, 2018		December 31, 2017
	(in thousands)
Less than one year	$	8,212,614	$	7,446,947
Due after one year and through three years	8,374,640		8,210,159
Due after three years and through five years	1,718,511		1,894,001
Due after five years	93,001		143,535
Total streaming content obligations	$	18,398,766	$	17,694,642

Content obligations include amounts related to the acquisition, licensing and production of streaming content. Obligations that are in non-U.S. dollar currencies are translated to the U.S. dollar at period end rates. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements as well as other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time the Company enters into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of such license agreements. The Company does not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant.

Legal Proceedings

From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations.

The Company is involved in litigation matters not listed herein but does not consider the matters to be material either individually or in the aggregate at this time. The Company's view of the matters not listed may change in the future as the litigation and events related thereto unfold.

Indemnification

In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.

The Company's obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.

It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. No amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.

7. Stockholders’ Equity

Stock Option Plan

In June 2011, the Company adopted the 2011 Stock Plan. The 2011 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. As of June 30, 2018, 9.7 million shares were reserved for future grants under the 2011 Stock Plan.

13

A summary of the activities related to the Company’s stock option plans is as follows:

			Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted- Average Exercise Price (per share)		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balances as of December 31, 2017	10,739,915		21,647,350		$	61.13
Granted	(1,056,538	)	1,056,538		282.22
Exercised	—		(2,064,819	)	39.92
Expired	—		(1,820	)	4.72
Balances as of June 30, 2018	9,683,377		20,637,249		$	74.58	5.85	$	6,538,997
Vested and exercisable as of June 30, 2018			20,637,249		$	74.58	5.85	$	6,538,997

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the second quarter of 2018. This amount changes based on the fair market value of the Company’s common stock.

A summary of the amounts related to option exercises, is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
	(in thousands)
Total intrinsic value of options exercised	$	246,795	$	101,727	$	524,705	$	208,824
Cash received from options exercised	26,936		14,826		83,271		39,004

Stock-based Compensation

Stock options granted are exercisable for the full ten year contractual term regardless of employment status. The following table summarizes the assumptions used to value option grants using the lattice-binomial model and the valuation data:

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Dividend yield	—		%	—		%	—		%	—		%
Expected volatility	42		%	34		%	40% - 42%			34% - 37%
Risk-free interest rate	2.90		%	2.37		%	2.61 % - 2.90%			2.37%-2.45%
Suboptimal exercise factor	2.93			2.51			2.80 - 2.93			2.48 - 2.51
Weighted-average fair value (per share)	$	161.39		$	67.21		$	141.62		$	64.67
Total stock-based compensation expense (in thousands)	$	81,232		$	44,028		$	149,627		$	88,916
Total income tax impact on provision (in thousands)	$	16,889		$	14,477		$	31,580		$	29,178

The Company considers several factors in determining the suboptimal exercise factor, including the historical and estimated option exercise behavior.

The Company calculates expected volatility based solely on implied volatility. The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions, and given consistently high trade volumes of the options, can reasonably be expected to be a better indicator of expected volatility than historical volatility of its common stock.

In valuing shares issued under the Company’s employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.

14

8. Accumulated Other Comprehensive Loss

The accumulated balance of other comprehensive loss, net of tax, for the three and six months ended June 30, 2018 decreased $16.7 million and increased $8.1 million, respectively, due to cumulative translation adjustments for its non-US dollar functional currency subsidiaries.

9. Income Taxes

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	(in thousands, except percentages)
Provision for (benefit from) income taxes	$	44,287		$	(51,638	)	$	53,779		$	(6,068	)
Effective tax rate	10		%	(370		)%	7		%	(3		)%

The effective tax rates for the three and six months ended June 30, 2018 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation and Federal and California research and development credits (“R&D”), partially offset by state taxes, foreign taxes, non-deductible expenses, and the international provisions from the U.S. tax reform enacted in December 2017. The effective tax rate for the three and six months ended June 30, 2017 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, foreign income taxed at rates lower than the U.S. statutory rate and Federal and California R&D credits, partially offset by state taxes and non-deductible expenses.

The increase in effective tax rates for the three and six months ended June 30, 2018 as compared to the same periods in 2017 were due primarily to lower benefit on a percentage basis from the recognition of excess tax benefits of stock-based compensation as well as additional expense related to foreign taxes, non-deductible expenses, and the international provisions from the U.S. tax reform enacted in December 2017. For the three and six months ended June 30, 2018, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $56.7 million and $117.4 million, respectively, compared to the three and six months ended June 30, 2017 of $32.8 million and $68.8 million, respectively.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Additional work is still necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

Gross unrecognized tax benefits were $56.1 million and $42.9 million as of June 30, 2018 and December 31, 2017, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $52.3 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of June 30, 2018, gross unrecognized tax benefits of $28.5 million was classified as “Other non-current liabilities” and $27.6 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision for (benefit from) income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision for (benefit from) income taxes” were not material in any of the periods presented.

Deferred tax assets of $509.9 million and $478.3 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The Company has a valuation allowance of $103.4 million and $49.4 million as of June 30, 2018 and December 31, 2017, respectively. The valuation allowance is primarily related to certain foreign tax credit carryovers that are not likely to be recognized.

The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS and the state of California for 2014 and 2015. The 2016 Federal tax return remains subject to examination by the IRS. The 2009 through 2016 state tax returns are subject to examination by state tax authorities. The Company is also currently under examination in the UK for 2015. The Company has no other significant foreign jurisdiction audits underway. The years 2012 through 2017 remain subject to examination by foreign tax authorities.

15

Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.

10. Segment Information

The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. Segment information is presented in the same manner that the Company’s chief operating decision maker (“CODM”) reviews the operating results in assessing performance and allocating resources. The Company’s CODM reviews revenues and contribution profit (loss) for each of the reportable segments. Contribution profit (loss) is defined as revenues less cost of revenues and marketing expenses incurred by the segment. The Company has aggregated the results of the International operating segments into one reportable segment because these operating segments share similar long-term economic and other qualitative characteristics.

The Domestic streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members in the United States. The International streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members outside of the United States. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail. Revenues and the related payment card fees are attributed to the operating segment based on the nature of the underlying membership (streaming or DVD) and the geographic region from which the membership originates. There are no internal revenue transactions between the Company’s segments.

Amortization of streaming content assets makes up the vast majority of cost of revenues. The Company obtains multi-territory or global rights for its streaming content and allocates these rights between Domestic and International streaming segments based on estimated fair market value. Amortization of content assets and other expenses associated with the acquisition, licensing, and production of streaming content for each streaming segment thus includes both expenses directly incurred by the segment as well as an allocation of expenses incurred for global or multi-territory rights. Other costs of revenues such as delivery costs are primarily attributed to the operating segment based on amounts directly incurred by the segment. Marketing expenses consist primarily of advertising expenses and certain payments made to marketing partners, including CE manufacturers, MVPDs, mobile operators and ISPs, which are generally included in the segment in which the expenditures are directly incurred.

The Company's long-lived tangible assets were located as follows:

	As of
	June 30, 2018		December 31, 2017
	(in thousands)
United States	$	312,872	$	289,875
International	36,774		29,529

The following tables represent segment information for the three and six months ended June 30, 2018:

	As of/ Three Months Ended June 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	57,379		72,762		2,999		—
Revenues	$	1,893,222	$	1,921,144	$	92,904	$	3,907,270
Cost of revenues	925,703		1,324,240		39,924		2,289,867
Marketing	227,961		298,819		—		526,780
Contribution profit	$	739,558	$	298,085	$	52,980	$	1,090,623
Other operating expenses							628,410
Operating income							462,213
Other income (expense)							(33,577		)
Provision for income taxes							44,287
Net income							$	384,349

16

	As of/ Six Months Ended June 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	57,379		72,762		2,999		—
Revenues	$	3,713,241	$	3,703,230	$	191,655	$	7,608,126
Cost of revenues	1,820,576		2,583,049		82,317		4,485,942
Marketing	455,983		550,019		—		1,006,002
Contribution profit	$	1,436,682	$	570,162	$	109,338	$	2,116,182
Other operating expenses							1,207,391
Operating income							908,791
Other income (expense)							(180,539		)
Provision for income taxes							53,779
Net income							$	674,473

The following tables represent segment information for the three and six months ended June 30, 2017:

	As of/ Three Months Ended June 30, 2017
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	51,921		52,031			3,758		—
Revenues	$	1,505,499	$	1,165,228		$	114,737	$	2,785,464
Cost of revenues	831,962		1,017,612			52,734		1,902,308
Marketing	113,608		160,715			—		274,323
Contribution profit (loss)	$	559,929	$	(13,099	)	$	62,003	$	608,833
Other operating expenses								481,026
Operating income								127,807
Other income (expense)								(113,845		)
Benefit from income taxes								(51,638		)
Net income								$	65,600

	As of/Six Months Ended June 30, 2017
	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	51,921		52,031		3,758		—
Revenues	$	2,975,541	$	2,211,427	$	235,131	$	5,422,099
Cost of revenues	1,581,450		1,864,929		112,953		3,559,332
Marketing	228,646		316,947		—		545,593
Contribution profit	$	1,165,445	$	29,551	$	122,178	$	1,317,174
Other operating expenses							932,425
Operating income							384,749
Other income (expense)							(146,995		)
Benefit from income taxes							(6,068		)
Net income							$	243,822

17

The following table represents the amortization of content assets:

	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Three months ended June 30,
2018	$	751,947	$	1,065,870	$	11,154	$	1,828,971
2017	696,688		854,106		16,511		1,567,305
Six months ended June 30,
2018	1,482,219		2,084,442		22,288		3,588,949
2017	1,305,436		1,551,041		35,109		2,891,586

(1) A membership (also referred to as a subscription) is defined as the right to receive Netflix service following sign-up and a method of payment being provided. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company's internal systems, which utilize industry standard geo-location technology. The Company offers free-trial memberships to certain new and rejoining members. Total members include those who are on a free-trial as long as a method of payment has been provided. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations become effective at the end of the prepaid membership period, while involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately.

18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; the impact of, and the Company’s response to, new accounting standards; content amortization; pricing changes; dividends; impact of foreign currency and exchange rate fluctuations, including on net income, revenues and average revenues per paying member; deferred revenue; investments in global streaming, including original content; impact of content on membership growth; cash use in connection with the acquisition, licensing and production of content; liquidity and free cash flow; unrecognized tax benefits; deferred tax assets; effective tax rate; accessing and obtaining additional capital, including future debt financing; accounting treatment for changes related to content assets; and future contractual obligations, including unknown streaming content obligations and timing of payments. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2017 filed with the Securities and Exchange Commission (“SEC”) on February 5, 2018, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA. 

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

Investors and others should note that we announce material financial information to our investors using our investor relations Web site (http://ir.netflix.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the United States ("U.S.") social media channels listed on our investor relations Web site.

Overview

We are the world’s leading internet entertainment service with over 130 million streaming memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the U.S., our members can receive DVDs delivered quickly to their homes.

We are a pioneer in the internet delivery of TV shows and movies, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy TV shows and movies directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of TV shows and movies directly over the internet. Historically, the first and fourth quarters (October through March) represent our greatest membership growth across our Domestic and International streaming segments. Increasingly, our membership growth is impacted by the release of certain high-profile original content, which may affect historical seasonal patterns. Internationally, we expect each market to demonstrate more predictable seasonal patterns as our service offering in each market becomes more established and we have a longer history to assess such patterns.

Our core strategy is to grow our streaming membership business globally within the parameters of our profit margin targets. We are continuously improving our members' experience by expanding our streaming content with a focus on a programming mix of content that delights our members. In addition, we are continuously enhancing our user interface and extending our streaming service to more internet-connected screens. Our members can download a selection of titles for offline viewing.

19

Results of Operations

The following represents our consolidated performance highlights:

	As of/ Three Months Ended						Change
	June 30, 2018			June 30, 2017			Q2'18 vs. Q2'17
	(in thousands, except revenue per membership and percentages)
Global streaming memberships at end of period	130,141			103,952			26,189			25	%
Global streaming average monthly revenue per paying membership	$	10.45		$	9.21		$	1.24		13	%
Revenues	3,907,270			2,785,464			1,121,806			40	%
Global operating income	462,213			127,807			334,406			262	%
Global operating margin	11.8		%	4.6		%	7.2		%	157	%
Net income	384,349			65,600			318,749			486	%

Consolidated revenues for the three months ended June 30, 2018 increased 40%, including an increase of 26% and 65% in revenues in the Domestic streaming and International streaming segments, respectively, as compared to the three months ended June 30, 2017. International revenues accounted for 49% of consolidated revenue for the three months ended June 30, 2018 as compared to 42% of consolidated revenue for the three months ended June 30, 2017. The increase in consolidated revenues was primarily driven by the growth in the average number of paid streaming memberships globally, the majority of which was growth in our international memberships. Average paid international streaming memberships accounted for 54% of total average paid streaming memberships as of June 30, 2018, as compared to 48% of total average paid streaming memberships for the same period in 2017. In addition, the average monthly revenue per paying streaming membership increased primarily due to price changes and a shift in the plan mix towards higher priced plans.

The increase in operating income is due primarily to increased revenues partially offset by increased content expenses as we continue to acquire, license and produce content, including more Netflix originals, as well as increased headcount costs to support continued improvements in our streaming service, our international expansion, and our growing content production activities. The increase in net income was comprised of an increase in operating income coupled with an increase in foreign exchange gains primarily due to the remeasurement of our euro denominated senior note, partially offset by an increase in interest expense primarily due to the higher principal of senior notes outstanding.

We offer three types of streaming membership plans. Our “basic” plan includes access to standard definition quality streaming on a single screen at a time. Our “standard” plan is our most popular streaming plan and includes access to high definition quality streaming on two screens concurrently. Our “premium” plan includes access to high definition and ultra-high definition quality content on four screens concurrently. As of June 30, 2018, pricing on our plans ranged in the U.S. from $7.99 to $13.99 per month and internationally from the U.S. dollar equivalent of approximately $4 to $20 per month. We expect that from time to time the prices of our membership plans in each country may increase.

The following represents the key elements to our segment results of operations:

• We define contribution profit (loss) as revenues less cost of revenues and marketing expenses incurred by the segment. It represents each segment's performance before global corporate costs. As markets within our International streaming segment become profitable, we increasingly focus on our global operating margin as a measure of profitability.

• For the Domestic and International streaming segments, amortization of the streaming content assets makes up the vast majority of cost of revenues. Increasingly, we obtain multi-territory or global rights for our streaming content and allocate these rights between Domestic and International streaming segments based on estimated fair market value. Expenses associated with the acquisition, licensing and production of streaming content, streaming delivery costs and other operations costs make up the remainder of cost of revenues. We have built our own global content delivery network (“Open Connect”) to help us efficiently stream a high volume of content to our members over the internet. Streaming delivery expenses, therefore, include equipment costs related to Open Connect and all third-party costs, such as cloud computing costs, associated with delivering streaming content over the internet. Other operations costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs incurred in making our content available to members.

• For the Domestic and International streaming segments, marketing expenses consist primarily of advertising expenses and certain payments made to our marketing partners, including consumer electronics manufacturers, MVPD's, mobile operators and ISP's. Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses are incurred by our Domestic and International streaming segments given our focus on building consumer awareness of the streaming offerings, and in particular our original content.

20

Domestic Streaming Segment

Three months ended June 30, 2018 as compared to the three months ended June 30, 2017

	As of/ Three Months Ended						Change
	June 30, 2018			June 30, 2017			Q2'18 vs. Q2'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net additions	674			1,067			(393		)	(37	)%
Memberships at end of period	57,379			51,921			5,458			11	%
Paid memberships at end of period	55,959			50,323			5,636			11	%
Average monthly revenue per paying membership	$	11.37		$	10.07		$	1.30		13	%
Contribution profit:
Revenues	$	1,893,222		$	1,505,499		$	387,723		26	%
Cost of revenues	925,703			831,962			93,741			11	%
Marketing	227,961			113,608			114,353			101	%
Contribution profit	739,558			559,929			179,629			32	%
Contribution margin	39		%	37		%

In the Domestic streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content to our members in the United States. The 26% increase in our domestic streaming revenues was primarily due to the 11% growth in the average number of paid memberships, as well as a 13% increase in the average monthly revenue per paying membership, resulting from our price changes and a shift in the plan mix towards higher priced plans. Our standard plan continues to be the most popular plan choice for new memberships.

The increase in domestic streaming cost of revenues was primarily due to a $55.3 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $38.4 million primarily due to an increase in other content-related costs, and an increase in payment processing fees which grew due to our growing member base.

Domestic marketing expenses increased primarily due to increased advertising and public relations, as well as increased payments to our partners.

Our Domestic streaming segment had a contribution margin of 39% for the three months ended June 30, 2018 and increased as compared to the contribution margin of 37% for the three months ended June 30, 2017 as growth in paid memberships and revenue outpaced content spend.

Six months ended June 30, 2018 as compared to the six months ended June 30, 2017

	As of/ Six Months Ended						Change
	June 30, 2018			June 30, 2017			YTD'18 vs. YTD'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net additions	2,629			2,490			139		6	%
Memberships at end of period	57,379			51,921			5,458		11	%
Paid memberships at end of period	55,959			50,323			5,636		11	%
Average monthly revenue per paying membership	$	11.31		$	10.07		$	1.24	12	%
Contribution profit:
Revenues	$	3,713,241		$	2,975,541		$	737,700	25	%
Cost of revenues	1,820,576			1,581,450			239,126		15	%
Marketing	455,983			228,646			227,337		99	%
Contribution profit	1,436,682			1,165,445			271,237		23	%
Contribution margin	39		%	39		%

21

The 25% increase in our domestic streaming revenues was primarily due to the 11% growth in the average number of paid memberships, as well as a 12% increase in average monthly revenue per paying membership, resulting from our price changes and a shift in the plan mix towards higher priced plans.

The increase in domestic streaming cost of revenues was primarily due to a $176.8 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $62.3 million primarily due to an increase in other content-related costs, and an increase in payment processing fees which grew due to our growing member base.

Domestic marketing expenses increased primarily due to increased advertising and public relations, as well as increased payments to our partners.

Our Domestic streaming segment had a contribution margin of 39% for the six months ended June 30, 2018, which remained flat when compared to the six months ended June 30, 2017.

International Streaming Segment

Three months ended June 30, 2018 as compared to the three months ended June 30, 2017

	As of/ Three Months Ended						Change
	June 30, 2018			June 30, 2017			Q2'18 vs. Q2'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net additions	4,472			4,137			335		8	%
Memberships at end of period	72,762			52,031			20,731		40	%
Paid memberships at end of period	68,395			48,713			19,682		40	%
Average monthly revenue per paying membership	$	9.69		$	8.29		$	1.40	17	%
Contribution profit (loss):
Revenues	$	1,921,144		$	1,165,228		$	755,916	65	%
Cost of revenues	1,324,240			1,017,612			306,628		30	%
Marketing	298,819			160,715			138,104		86	%
Contribution profit (loss)	298,085			(13,099		)	311,184		2,376	%
Contribution margin	16		%	(1		)%

In the International streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content to our members outside the United States. The 65% increase in our international revenues was due to the 41% growth in the average number of paid international memberships, in addition to a 17% increase in the average monthly revenue per paying membership. The increase in the average monthly revenue per paying membership was due to price changes and a shift in the plan mix towards higher priced plans coupled with favorable fluctuations in foreign exchange rates. We estimate that international revenues in the second quarter of 2018 would have been approximately $65.0 million lower if foreign exchange rates had remained consistent with the foreign exchange rates from the second quarter of 2017. If foreign currency exchange rates fluctuate more than expected, revenues and average revenue per paying membership may differ from our expectations.

The increase in international cost of revenues was primarily due to a $211.8 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $94.8 million primarily due to increases in other content-related costs, as well as increases in our streaming delivery expenses, costs associated with our customer service call centers and payment processing fees, all driven by our growing member base.

International marketing expenses increased mainly due to increased advertising and public relations, as well as increased payments to our partners.

International contribution profit for the three months ended June 30, 2018 was $298.1 million as opposed to a contribution loss of $13.1 million for the three months ended June 30, 2017 as profit growth in our more mature markets offset investments in newer markets.

Six months ended June 30, 2018 as compared to the six months ended June 30, 2017

22

	As of/ Six Months Ended						Change
	June 30, 2018			June 30, 2017			YTD'18 vs. YTD'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net additions	9,930			7,666			2,264		30	%
Memberships at end of period	72,762			52,031			20,731		40	%
Paid memberships at end of period	68,395			48,713			19,682		40	%
Average monthly revenue per paying membership	$	9.73		$	8.20		$	1.53	19	%
Contribution profit:
Revenues	$	3,703,230		$	2,211,427		$	1,491,803	67	%
Cost of revenues	2,583,049			1,864,929			718,120		39	%
Marketing	550,019			316,947			233,072		74	%
Contribution profit	570,162			29,551			540,611		1,829	%
Contribution margin	15		%	1		%

The 67% increase in our international revenues was due to the 41% growth in our average number of paid international memberships, in addition to a 19% increase in the average monthly revenue per paying membership. The increase in the average monthly revenue per paying membership was due to price changes and a shift in the plan mix towards higher priced plans coupled with favorable fluctuations in foreign exchange rates. We estimate that international revenues in the six months ended June 30, 2018 would have been approximately $179.3 million lower if foreign exchange rates had remained consistent with the foreign exchange rates for the six months ended June 30, 2017.

The increase in international cost of revenues was primarily due to a $533.4 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $184.7 million primarily due to increases increases in other content-related costs, as well as increases in our streaming delivery expenses, costs associated with our customer service call centers and payment processing fees, all driven by our growing member base, partially offset by decreases resulting from exchange rate fluctuations.

International marketing expenses for the six months ended June 30, 2018increased mainly due to increased advertising and public relations, as well as increased payments to our partners.

International contribution profit grew to $570.2 million for the six months ended June 30, 2018 as compared to $29.6 million profit for the six months ended June 30, 2017 as profit growth in our more mature markets offset investments in newer markets.

Domestic DVD Segment

Three months ended June 30, 2018 as compared to the three months ended June 30, 2017

	As of/ Three Months Ended						Change
	June 30, 2018			June 30, 2017			Q2'18 vs. Q2'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net losses	(168		)	(186		)	18			10	%
Memberships at end of period	2,999			3,758			(759		)	(20	)%
Paid memberships at end of period	2,971			3,692			(721		)	(20	)%
Average monthly revenue per paying membership	$	10.14		$	10.12		$	0.02		—	%
Contribution profit:
Revenues	$	92,904		$	114,737		$	(21,833	)	(19	)%
Cost of revenues	39,924			52,734			(12,810		)	(24	)%
Contribution profit	52,980			62,003			(9,023		)	(15	)%
Contribution margin	57		%	54		%

In the Domestic DVD segment, we derive revenues from our DVD-by-mail membership services. The price per plan for DVD-by-mail varies from $4.99 to $14.99 per month according to the plan chosen by the member. DVD-by-mail plans differ by the number of DVDs that a

23

member may have out at any given point. Members electing access to high definition Blu-ray discs, in addition to standard definition DVDs, pay a surcharge ranging from $2 to $3 per month for our most popular plans. Cost of revenues in the Domestic DVD segment consist primarily of delivery expenses such as packaging and postage costs, content expenses, and other expenses associated with our DVD processing and customer service centers. The number of memberships to our DVD-by-mail offering is declining, and we anticipate that this decline will continue.

Our Domestic DVD segment contribution margin was 57% for the three months ended June 30, 2018, as compared to 54% for the three months ended June 30, 2017, due to the decreased DVD usage by paying members and decreased DVD content expenses.

Six months ended June 30, 2018 as compared to the six months ended June 30, 2017

	As of/ Six Months Ended						Change
	June 30, 2018			June 30, 2017			YTD'18 vs. YTD'17
	(in thousands, except revenue per membership and percentages)
Memberships:
Net losses	(384		)	(356		)	(28		)	(8	)%
Memberships at end of period	2,999			3,758			(759		)	(20	)%
Paid memberships at end of period	2,971			3,692			(721		)	(20	)%
Average monthly revenue per paying membership	$	10.16		$	10.14		$	0.02		—	%
Contribution profit:
Revenues	$	191,655		$	235,131		$	(43,476	)	(18	)%
Cost of revenues	82,317			112,953			(30,636		)	(27	)%
Contribution profit	109,338			122,178			(12,840		)	(11	)%
Contribution margin	57		%	52		%

Our Domestic DVD segment contribution margin was 57% for the six months ended June 30, 2018, as compared to 52% for the six months ended June 30, 2017, due to the decreased DVD usage by paying members and decreased DVD content expenses.

Consolidated Operating Expenses

Technology and Development

Technology and development expenses consist of payroll and related expenses for all technology personnel, as well as other costs incurred in making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendation, merchandising and streaming delivery technology and infrastructure. Technology and development expenses also include costs associated with computer hardware and software.

Three months ended June 30, 2018 as compared to the three months ended June 30, 2017

	Three Months Ended						Change
	June 30, 2018			June 30, 2017			Q2'18 vs. Q2'17
	(in thousands, except percentages)
Technology and development	$	317,213		$	267,083		$	50,130	19	%
As a percentage of revenues	8		%	10		%

The increase in technology and development expenses was primarily due to a $45.8 million increase in personnel-related costs, including stock-based compensation expense, resulting from an increase in compensation for existing employees and growth in average headcount supporting continued improvements in our streaming service and our international expansion.

24

Six months ended June 30, 2018 as compared to the six months ended June 30, 2017

	Six Months Ended						Change
	June 30, 2018			June 30, 2017			YTD'18 vs. YTD'17
	(in thousands, except percentages)
Technology and development	$	617,943		$	524,191		$	93,752	18	%
As a percentage of revenues	8		%	10		%

The increase in technology and development expenses was primarily due to a $83.6 million increase in personnel-related costs, including stock-based compensation expense, resulting from an increase in compensation for existing employees and a growth in average headcount supporting continued improvements in our streaming service and our international expansion.

General and Administrative

General and administrative expenses consist of payroll and related expenses for corporate personnel, as well as for personnel that support global functions related to content, marketing, public relations and operations other than customer service. General and administrative expenses also includes professional fees and other general corporate expenses.

Three months ended June 30, 2018 as compared to the three months ended June 30, 2017

	Three Months Ended				Change
	June 30, 2018		June 30, 2017		Q2'18 vs. Q2'17
	(in thousands, except percentages)
General and administrative	$	311,197	$	213,943	$	97,254