EX-99.1 2 nflx-093018xex991.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1
October 16, 2018

Fellow shareholders,

Our broad slate of original programming helped drive a solid quarter of growth with streaming revenue increasing 36% year over year and global membership surpassing 130 million paid and 137 million total. We’re thrilled to be growing internet entertainment across the globe.
 (in millions except per share data and Streaming Content Obligations)
Q3'17
Q4'17
Q1'18
Q2'18
Q3'18
Q4'18 Forecast
Total (Including DVD):
 
 
 
 
 
 
Revenue
$
2,985

$
3,286

$
3,701

$
3,907

$
3,999

$
4,199

Y/Y % Growth
30.3
%
32.6
%
40.4
%
40.3
%
34.0
%
27.8
%
Operating Income
$
209

$
245

$
447

$
462

$
481

$
205

Operating Margin
7.0
%
7.5
%
12.1
%
11.8
%
12.0
%
4.9
%
Net Income
$
130

$
186

$
290

$
384

$
403

$
105

Diluted EPS
$
0.29

$
0.41

$
0.64

$
0.85

$
0.89

$
0.23

 
 
 
 
 
 
 
Total Streaming:
 
 
 
 
 
 
Revenue
$
2,875

$
3,181

$
3,602

$
3,814

$
3,911

$
4,114

Y/Y % Growth
33.2
%
35.3
%
43.2
%
42.8
%
36.0
%
29.3
%
Paid Memberships
104.02

110.64

118.90

124.35

130.42

138.02

Paid Net Additions
4.99

6.62

8.26

5.45

6.07

7.60

Total Memberships
109.25

117.58

125.00

130.14

137.10

146.50

Net Additions
5.30

8.33

7.41

5.15

6.96

9.40

 
 
 
 
 
 
 
US Streaming:
 
 
 
 
 
 
Revenue
$
1,547

$
1,630

$
1,820

$
1,893

$
1,937

$
1,995

Contribution Profit
$
554

$
561

$
697

$
740

$
762

$
663

Contribution Margin
35.8
%
34.4
%
38.3
%
39.1
%
39.3
%
33.2
%
Paid Memberships
51.35

52.81

55.09

55.96

56.96

58.46

Paid Net Additions
1.02

1.47

2.28

0.87

1.00

1.50

Total Memberships
52.77

54.75

56.71

57.38

58.46

60.26

Net Additions
0.85

1.98

1.96

0.67

1.09

1.80

 
 
 
 
 
 
 
International Streaming:
 
 
 
 
 
 
Revenue
$
1,327

$
1,550

$
1,782

$
1,921

$
1,973

$
2,119

Contribution Profit (Loss)
$
62

$
135

$
272

$
298

$
338

$
211

Contribution Margin
4.7
%
8.7
%
15.3
%
15.5
%
17.1
%
10.0
%
Paid Memberships
52.68

57.83

63.82

68.39

73.46

79.56

Paid Net Additions
3.97

5.16

5.98

4.58

5.07

6.10

Total Memberships
56.48

62.83

68.29

72.76

78.64

86.24

Net Additions
4.45

6.36

5.46

4.47

5.87

7.60

 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
Net cash (used in) operating activities
$
(420
)
$
(488
)
$
(237
)
$
(518
)
$
(690
)
 
Free Cash Flow
$
(465
)
$
(524
)
$
(287
)
$
(559
)
$
(859
)
 
EBITDA
$
273

$
313

$
534

$
563

$
584

 
Shares (FD)
447.4

448.1

450.4

451.6

451.9

 
Streaming Content Obligations* ($B)
17.0

17.7

17.9

18.4

18.6

 
*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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1


Q3 Results and Q4 Forecast
Streaming revenue grew 36% year over year in Q3, as average paid membership increased 25% and ASP rose 8%. International revenue included a -$90 million year over year impact from currency. Excluding the impact of F/X, international ASP rose 11% year over year and 2% sequentially.
Operating margin expanded 500 bps year over year to 12%. This exceeded our forecast of 10.5% due to the timing of content and marketing spend, a portion of which moved into Q4. EPS of $0.89 vs. $0.29 last year included an $8 million non-cash unrealized gain from F/X remeasurement on our Eurobond and a $38 million tax benefit related to adjustments to the transition tax on the repatriation of foreign earnings and the remeasurement of certain deferred tax assets (both related to true-ups from the 2017 US tax reform).
As a reminder, the quarterly guidance we provide is our internal forecast at the time we report and we strive for accuracy in our forecast. This means in some quarters we will be high and other quarters low relative to our guidance. This quarter, we under-forecasted memberships. Total net additions of 7.0m (up 31% vs. 5.3m last year) was higher than our forecast of 5.0m, and represented a new Q3 record. The variance relative to forecast was due to greater-than-expected acquisition globally, with strong growth broadly across all our markets including Asia.
For Q4, we forecast paid net additions of 7.6m, and total net additions of 9.4m, up 15% and 13% compared with 6.6m and 8.3m in Q4 last year. We’re still targeting operating margin to be at the lower end of the 10%-11% range for the full year 2018. This means that in Q4 we expect operating margin will dip to 5% from 7.5% in the year ago quarter. As we have written in previous letters, this sequential decline in operating margin in the second half of 2018 is due to the timing of content spend and a higher mix of original films in Q4’18 (film amortization is more accelerated than series amortization due to more front-loaded viewing). We would have preferred our operating margin to have been a little steadier over the course of the year, and we will target a little less quarterly variance next year in our progress to our full year target of 13% (assuming no major FX moves).
Next quarter, we expect to reclassify certain personnel costs from G&A to Content and Marketing, and from Technology & Development to Other Cost of Revenues. This change would reflect the ongoing evolution of our business to include self-production of content. A growing number of employees are becoming involved in developing content as we migrate to self-produce more of our content vs. only licensing original and non-original content. We expect to make the same change with marketing and other tech employee costs to maintain consistency in approach. The change would result in a comprehensive view of our total spending on content and marketing. This reclassification would have no impact on total operating expenses, operating profit or operating margin. If enacted, we will provide quarterly pro-formas so investors will see the change cleanly.
Evolving to Paid Membership Focus
The chart below illustrates our weekly paid net additions (on the right) and total net additions (on the left, which includes paid + free) over the last several years. Paid net adds are more steady, as total net additions can be skewed by free trials of varying quality. This skew adds noise to our membership forecasts in a way that isn’t material to revenue or the business. In comparison, paid net adds are a more reliable indicator of revenue growth.


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2


globalpaidnetaddscharta01.jpg
Because growth in paid memberships is more steady, our forecast for paid net adds has been historically more accurate than our total net adds forecast. For example in Q2’18, our paid net adds forecast was off by 11% compared to a 17% variance for total net adds forecast. In addition, we are learning that no free trial may result in greater revenue in some markets, so free trial count at the end of a quarter will likely be a less insightful predictor of future growth than in the past.
As a result, starting with our earnings report in January 2019, we’ll only guide to paid memberships; a year after that, in 2020, we’ll cease reporting on end-of-quarter free trial count. We will show the weekly paid net adds graph, as above on the right, in each earnings letter going forward. We expect this additional disclosure will be helpful to your understanding of our business, in particular, how steady our paid membership growth is in the near term.
Content
We have three major categories of content: licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate), and now owned original first-window content from the Netflix studio, such as Stranger Things. Within those categories there are lots of subdivisions and per-territory treatments, but those are the big three buckets.
It was just two years ago when we began building the third category: a film and TV studio within Netflix. Some of our notable owned-titles in addition to Stranger Things include: Big Mouth, The Ranch, Bright, Godless, The Kissing Booth, 3%, Dark, Sacred Games and Nailed It. In addition to reducing our reliance on outside studios, this initiative provides us with greater control over the content we create (e.g., long term global rights), the ability to strengthen title-brand-love and franchise value (like consumer products) and potentially lower costs (as we can avoid the markup 3rd party studios charge us). To do this, we’ve had to develop new capabilities to manage the entire production process from creative support, production planning, crew and vendor management to visual effects, to name a few.
Today, we employ hundreds of people in physical production, working on a wide variety of owned titles spread across scripted and unscripted series, kids, international content, standup, docs and feature films from all over the world. To support our efforts, we’ll need more production capacity; we recently announced the selection of Albuquerque, New Mexico1 as the site of a new US production hub, where we anticipate bringing $1 billion dollars in production over the next 10 years and creating up to 1,000 production jobs per year. Our internal studio is already the single largest supplier of content to Netflix (on a cash basis).
___________________________________
1 https://ktla.com/2018/10/08/netflix-finalizing-new-production-hub-in-new-mexico/

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3



We strive to offer a wide breadth of programming because we want to maximize the size of our membership base and people have very diverse tastes that we seek to satisfy. This also reduces our dependence on any individual title. Even our largest titles, which are viewed by tens of millions of our members, only account for a low single digit percentage of total streaming hours. Therefore, the vast majority of our growth in any given quarter is not attributable to any one piece of content, as you can see by the steadiness in our paid net additions.
This past quarter, in original series, we launched new seasons of Orange is the New Black, Ozark, Marvel’s Luke Cage and debuted Insatiable. Late in the quarter, we released Maniac, a limited series starring Emma Stone and Jonah Hill. We have also been ramping up our animated adult comedy offering. In Q3, we successfully premiered Disenchantment, from Matt Groening who created The Simpsons and Futurama, and Paradise PD, from the makers of Brickleberry, to complement Big Mouth, Bojack Horseman and F is for Family.
We also continue to expand our international originals, with projects spanning India, Mexico, Spain, Italy, Germany, Brazil, France, Turkey and throughout the Middle East to just name a few. In India, our hit series Sacred Games was followed up by Ghoul in late August. La Casa de las Flores, our latest Mexican original, has become a big hit.
As part of our Summer of Love2 and building on the success of Set It Up and The Kissing Booth, we released original films Like Father (starring Kristen Bell and Kelsey Grammer in a daughter-father dramedy), Sierra Burgess Is a Loser (starring Stranger Things’ Barb, Shannon Purser) and To All the Boys I’ve Loved Before, which is one of our most viewed original films ever with strong repeat viewing. More than 80 million accounts have watched one or more of the Summer of Love films globally and we are already in production for the next set of original rom-coms for our members.
This December, we'll be launching ROMA,3 from Oscar-winning director Alfonso Cuarón. We support simultaneous release in cinema and on Netflix, and the film will debut on Netflix and on over 100 screens worldwide, just as we are doing currently with 22 July,4 from Oscar-nominated director Paul Greengrass. We believe in our member-centric simultaneous release model for our original films and welcome additional theatre chains that are open to carrying our films to provide the shared-viewing, big-screen experience to their customers who enjoy that option.
We’ve come a long way in the five years since launching original content on Netflix. In addition to our commercial success, we’re ecstatic when the creators we work with are recognized for their inspiring work. This year, Netflix originals led with 112 Emmy nominations spanning 40 of our shows, docs and specials across nearly every category and we’re humbled to have tied HBO with the most number of Emmy wins with 23.
We’re also thrilled that Netflix has been a launching pad for a new generation of global stars like Millie Bobby Brown, Jacob Elordi, Noah Centineo and Gaten Matarazzo. When our service helps our talent develop huge fan bases (from small followings to over 10 million Instagram followers), we can attract the best talent in the world. This explosive growth in popularity is a good indicator that our shows and stars are breaking out around the planet.

___________________________________
2 https://www.forbes.com/sites/danafeldman/2018/06/20/its-the-summer-of-love-netflix-releases-6-new-original-romcoms/
3 https://variety.com/2018/film/in-contention/roma-netflix-best-picture-oscar-contender-1202922009/
4 https://www.slashfilm.com/22-july-theatrical-release/

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instagramfollowersa01.jpg
More EU content
The European Union is currently rewriting its audio visual rules, which will eventually require subscription streaming services to devote a minimum of 30% of their catalog to European works. In addition, some member states are looking to require services like ours to invest some portion of local revenues into European works. We anticipate being able to meet these requirements by evolving our content offering.
We are heavily investing around the world to share stories broadly and to strengthen local production capacity and opportunity. We'd prefer to focus on making our service great for our members, which would include producing local content, rather than on satisfying quotas, but we anticipate that a regional content quota which approximates the region's share of our global membership will only marginally reduce member satisfaction. Nonetheless, quotas, regardless of market size, can negatively impact both the customer experience and creativity. We believe a more effective way for a country to support strong local content is to directly incentivize local content creators, independent of distribution channel.
Product and Partnerships
We continue to expand our partnerships with pay TV providers, ISPs and mobile operators across the globe. In Q3, we rolled out the first mobile bundle in Japan with KDDI and expanded our partnership with Verizon to pre-install the Netflix app on Android phones. In Q4, we plan to roll out our previously announced partnership with Sky UK.
Competition
We compete for entertainment time with linear TV, YouTube, video gaming, web browsing, social media, DVD and PPV, and more. In that competition for screen hours, we lose most of the time, but we win enough to keep growing.

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As internet entertainment grows, more companies see the large opportunity. Content companies such as WarnerMedia and Disney/Fox are moving to self-distribute their own content; tech firms like Apple, Amazon and others are investing in premium content to enhance their distribution platforms. Amid these massive competitors on both sides, plus traditional media firms, our job is to make Netflix stand out so that when consumers have free time, they choose to spend it with our service.
Within linear TV, New Fox appears to have a great strategy, which is to focus on large simultaneous-viewing sports and news. These content areas are not transformed by on-demand viewing and personalization in the way that TV series and movies are, so they are more resistant to the rise of the internet. Other linear networks are likely to follow this model over time.
Free Cash Flow and Capital Structure
Free cash flow in Q3 was -$859 million vs. -$465 million in the year ago quarter. As a reminder, our growing mix of self-produced content, which requires us to fund content during the production phase prior to its release on Netflix, is the primary driver of our working capital needs that creates the gap between our positive net income and our free cash flow deficit.
We anticipate that FCF will be closer to -$3 billion than to -$4 billion for the full year 2018. We expect our quarterly FCF deficit will increase sequentially from Q3 to Q4 as our year to date FCF is -$1.7 billion. We currently see next year’s negative FCF as roughly flat with this year.
We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past. These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.

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Reference
For quick reference, our eight most recent investor letters are: July 2018,5 April 2018,6 January 2018,7 October 2017,8 July 2017,9 April 2017,10 January 2017,11 October 2016.12
October 16, 2018 Earnings Interview, 3pm PST
Our video interview with Eric Sheridan of UBS will be on youtube/netflixir at 3pm PST today. Questions that investors would like to see asked should be sent to eric.sheridan@ubs.com. Reed Hastings, CEO, David Wells, CFO, Ted Sarandos, Chief Content Officer, Greg Peters, Chief Product Officer and Spencer Wang, VP of IR/Corporate Development will all be on the video to answer Eric’s questions.

 
IR Contact: 
PR Contact: 
Spencer Wang
Richard Siklos
VP, Finance/IR & Corporate Development
VP, Corporate Communications
408 809-5360
408 540-2629
























___________________________________
5 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2018/q2/FINAL-Q2-18-Shareholder-Letter.pdf
6 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2018/q1/FINAL-Q1-18-Shareholder-Letter.pdf
7 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2017/q4/COMBINED-Q4-17-Shareholder-Letter-FINAL.pdf
8 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2017/q3/Q3_17_Shareholder_Letter_COMBINED.pdf
9 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2017/q2/Q2_17_Shareholder_Letter.pdf
10 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2017/q1/Q117ShareholderLetterV2FINAL.pdf
11 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2016/q4/Q416ShareholderLetter.pdf
12 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2016/q3/FINAL_Q3_Letter.pdf

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Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-GAAP financial measure of free cash flow and EBITDA. 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, 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 reclassification of personnel costs and its impact on financials; revenue impact of no free trials; impact of our Albuquerque, NM production hub; internal studio as supplier of content; expansion of international originals; content launches, including simultaneous release in theatre and on Netflix; our ability to adapt to changing content laws in Europe; partnerships; competition; content spend and strategy, including outside the US and impact on future growth; resistance to internet competition for certain linear TV strategies; domestic and international net, total and paid membership; revenue; contribution profit (loss) and contribution margin for both domestic international operations, as well as consolidated operating income, operating margins; 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, as amended by Form 10-K/A, filed with the Securities and Exchange Commission on February 5, 2018. 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, as amended by Form 10-K/A. 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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Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
June 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Revenues
$
3,999,374

 
$
3,907,270

 
$
2,984,859

 
$
11,607,500

 
$
8,406,958

Cost of revenues
2,412,346

 
2,289,867

 
1,992,980

 
6,898,288

 
5,552,312

Marketing
435,269

 
526,780

 
312,490

 
1,441,271

 
858,083

Technology and development
327,026

 
317,213

 
255,236

 
944,969

 
779,427

General and administrative
344,065

 
311,197

 
215,526

 
933,513

 
623,760

Operating income
480,668

 
462,213

 
208,627

 
1,389,459

 
593,376

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(108,862
)
 
(101,605
)
 
(60,688
)
 
(291,686
)
 
(162,912
)
Interest and other income (expense)
7,004

 
68,028

 
(31,702
)
 
9,289

 
(76,473
)
Income before income taxes
378,810

 
428,636

 
116,237

 
1,107,062

 
353,991

Provision for (benefit from) income taxes
(24,025
)
 
44,287

 
(13,353
)
 
29,754

 
(19,421
)
Net income
$
402,835

 
$
384,349

 
$
129,590

 
$
1,077,308

 
$
373,412

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.92

 
$
0.88

 
$
0.30

 
$
2.48

 
$
0.87

Diluted
$
0.89

 
$
0.85

 
$
0.29

 
$
2.39

 
$
0.84

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
435,809

 
435,097

 
432,404

 
435,033

 
431,473

Diluted
451,919

 
451,552

 
447,362

 
451,283

 
446,367




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Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands)
 
 
As of
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,067,534

 
$
2,822,795

Current content assets, net
4,987,916

 
4,310,934

Other current assets
674,531

 
536,245

Total current assets
8,729,981

 
7,669,974

Non-current content assets, net
13,408,443

 
10,371,055

Property and equipment, net
371,152

 
319,404

Other non-current assets
856,653

 
652,309

Total assets
$
23,366,229

 
$
19,012,742

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
4,613,011

 
$
4,173,041

Accounts payable
441,427

 
359,555

Accrued expenses
527,079

 
315,094

Deferred revenue
716,723

 
618,622

Total current liabilities
6,298,240

 
5,466,312

Non-current content liabilities
3,593,823

 
3,329,796

Long-term debt
8,336,586

 
6,499,432

Other non-current liabilities
127,927

 
135,246

Total liabilities
18,356,576

 
15,430,786

Stockholders' equity:
 
 
 
Common stock
2,215,736

 
1,871,396

Accumulated other comprehensive loss
(14,508
)
 
(20,557
)
Retained earnings
2,808,425

 
1,731,117

Total stockholders' equity
5,009,653

 
3,581,956

Total liabilities and stockholders' equity
$
23,366,229

 
$
19,012,742

 


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Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018

June 30,
2018

September 30,
2017

September 30,
2018
 
September 30,
2017
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income
$
402,835

 
$
384,349

 
$
129,590

 
$
1,077,308

 
$
373,412

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
Additions to streaming content assets
(3,238,717
)
 
(3,033,721
)
 
(2,315,017
)
 
(9,259,185
)
 
(7,328,104
)
Change in streaming content liabilities
65,868

 
288,474

 
(34,587
)
 
733,227

 
846,560

Amortization of streaming content assets
1,911,767

 
1,817,817

 
1,627,477

 
5,478,428

 
4,483,954

Amortization of DVD content assets
9,959

 
11,154

 
13,259

 
32,247

 
48,368

Depreciation and amortization of property, equipment and intangibles
21,161

 
19,736

 
19,238

 
59,938

 
52,838

Stock-based compensation expense
82,316

 
81,232

 
44,763

 
231,943

 
133,679

Other non-cash items
8,962

 
13,921

 
9,896

 
31,092

 
43,081

Foreign currency remeasurement loss (gain) on long-term debt
(7,670
)
 
(85,410
)
 
50,830

 
(52,000
)
 
115,050

Deferred taxes
(39,453
)
 
(9,539
)
 
(57,090
)
 
(71,041
)
 
(104,556
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Other current assets
(30,364
)
 
(25,564
)
 
(41,399
)
 
(111,833
)
 
(147,000
)
Accounts payable
(4,449
)
 
7,733

 
34,029

 
77,367

 
10,590

Accrued expenses
134,000

 
(52,851
)
 
74,006

 
200,198

 
119,506

Deferred revenue
18,983

 
23,848

 
32,947

 
98,101

 
94,777

Other non-current assets and liabilities
(25,609
)
 
40,582

 
(7,549
)
 
28,803

 
(40,146
)
Net cash used in operating activities
(690,411
)
 
(518,239
)
 
(419,607
)
 
(1,445,407
)
 
(1,297,991
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of DVD content assets
(7,731
)
 
(12,552
)
 
(10,217
)
 
(31,079
)
 
(43,213
)
Purchases of property and equipment
(39,333
)
 
(27,323
)
 
(33,963
)
 
(103,826
)
 
(151,717
)
Change in other assets
(121,630
)
 
(441
)
 
(1,107
)
 
(123,857
)
 
(2,940
)
Purchases of short-term investments

 

 
(2,799
)
 

 
(74,819
)
Proceeds from sale of short-term investments

 

 
250,278

 

 
320,154

Proceeds from maturities of short-term investments

 

 

 

 
22,705

Net cash provided by (used in) investing activities
(168,694
)
 
(40,316
)
 
202,192

 
(258,762
)
 
70,170

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of debt

 
1,900,000

 

 
1,900,000

 
1,420,510

Debt issuance costs

 
(16,992
)
 
(312
)
 
(16,992
)
 
(15,325
)
Proceeds from issuance of common stock
29,781

 
26,936

 
34,669

 
113,052

 
73,673

Other financing activities
(544
)
 
(532
)
 
65

 
(1,397
)
 
189

Net cash provided by financing activities
29,237

 
1,909,412

 
34,422

 
1,994,663

 
1,479,047

Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(5,562
)
 
(36,340
)
 
10,685

 
(34,725
)
 
27,667

Net increase (decrease) in cash, cash equivalents, and restricted cash
(835,430
)
 
1,314,517

 
(172,308
)
 
255,769

 
278,893

Cash, cash equivalents, and restricted cash at beginning of period
3,913,994

 
2,599,477

 
1,918,777

 
2,822,795

 
1,467,576

Cash, cash equivalents, and restricted cash at end of period
$
3,078,564

 
$
3,913,994

 
$
1,746,469

 
$
3,078,564

 
$
1,746,469

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
June 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Non-GAAP free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
$
(690,411
)
 
$
(518,239
)
 
$
(419,607
)
 
$
(1,445,407
)
 
$
(1,297,991
)
Acquisition of DVD content assets
(7,731
)
 
(12,552
)
 
(10,217
)
 
(31,079
)
 
(43,213
)
Purchases of property and equipment
(39,333
)
 
(27,323
)
 
(33,963
)
 
(103,826
)
 
(151,717
)
Change in other assets
(121,630
)
 
(441
)
 
(1,107
)
 
(123,857
)
 
(2,940
)
Non-GAAP free cash flow
$
(859,105
)
 
$
(558,555
)
 
$
(464,894
)
 
$
(1,704,169
)
 
$
(1,495,861
)

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11



Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
 
As of / Three Months Ended
 
As of/ Nine Months Ended
 
September 30,
2018
 
June 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Domestic Streaming
 
 
 
 
 
 
 
 
 
Paid net membership additions
998

 
872

 
1,022

 
4,147

 
3,440

Paid memberships at end of period
56,957

 
55,959

 
51,345

 
56,957

 
51,345

Total memberships at end of period
58,464

 
57,379

 
52,772

 
58,464

 
52,772

 
 
 
 
 
 
 
 
 
 
Revenues
$
1,937,314

 
$
1,893,222

 
$
1,547,210

 
$
5,650,555

 
$
4,522,751

Cost of revenues
991,823

 
925,703

 
864,408

 
2,812,399

 
2,445,858

Marketing
183,521

 
227,961

 
128,901

 
639,504

 
357,547

Contribution profit
761,970

 
739,558

 
553,901

 
2,198,652

 
1,719,346

 
 
 
 
 
 
 
 
 
 
International Streaming
 
 
 
 
 
 
 
 
 
Paid net membership additions
5,070

 
4,580

 
3,965

 
15,631

 
11,493

Paid memberships at end of period
73,465

 
68,395

 
52,678

 
73,465

 
52,678

Total memberships at end of period
78,635

 
72,762

 
56,476

 
78,635

 
56,476

 
 
 
 
 
 
 
 
 
 
Revenues
$
1,973,283

 
$
1,921,144

 
$
1,327,435

 
$
5,676,513

 
$
3,538,862

Cost of revenues
1,383,422

 
1,324,240

 
1,081,485

 
3,966,471

 
2,946,414

Marketing
251,748

 
298,819

 
183,589

 
801,767

 
500,536

Contribution profit
338,113

 
298,085

 
62,361

 
908,275

 
91,912

 
 
 
 
 
 
 
 
 
 
Domestic DVD
 
 
 
 
 
 
 
 
 
Paid memberships at end of period
2,828

 
2,971

 
3,520

 
2,828

 
3,520

Total memberships at end of period
2,852

 
2,999

 
3,569

 
2,852

 
3,569

 
 
 
 
 
 
 
 
 
 
Revenues
$
88,777

 
$
92,904

 
$
110,214

 
$
280,432

 
$
345,345

Cost of revenues
37,101

 
39,924

 
47,087

 
119,418

 
160,040

Contribution profit
51,676

 
52,980

 
63,127

 
161,014

 
185,305

 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
3,999,374

 
$
3,907,270

 
$
2,984,859

 
$
11,607,500

 
$
8,406,958

Cost of revenues
2,412,346

 
2,289,867

 
1,992,980

 
6,898,288

 
5,552,312

Marketing
435,269

 
526,780

 
312,490

 
1,441,271

 
858,083

Contribution profit
1,151,759

 
1,090,623

 
679,389

 
3,267,941

 
1,996,563

Other operating expenses
671,091

 
628,410

 
470,762

 
1,878,482

 
1,403,187

Operating income
480,668

 
462,213

 
208,627

 
1,389,459

 
593,376

Other expense
(101,858
)
 
(33,577
)
 
(92,390
)
 
(282,397
)
 
(239,385
)
Provision for (benefit from) income taxes
(24,025
)
 
44,287

 
(13,353
)
 
29,754

 
(19,421
)
Net income
$
402,835

 
$
384,349

 
$
129,590

 
$
1,077,308

 
$
373,412






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12


Netflix, Inc.
Non-GAAP Information
(unaudited)
(in thousands)

 
 
 
September 30,
2017
 
December 31,
2017
 
March 31,
2018
 
June 30,
2018
 
September 30,
2018
Non-GAAP Adjusted EBITDA reconciliation:
 
 
 
 
 
 
 
 
 
GAAP net income
$
129,590

 
$
185,517

 
$
290,124

 
$
384,349

 
$
402,835

Add:
 
 
 
 
 
 
 
 
 
Other expense
92,390

 
113,973

 
146,962

 
33,577

 
101,858

Provision for (benefit from) income taxes
(13,353
)
 
(54,187
)
 
9,492

 
44,287

 
(24,025
)
Depreciation and amortization of property, equipment and intangibles
19,238

 
19,073

 
19,041

 
19,736

 
21,161

Stock-based compensation expense
44,763

 
48,530

 
68,395

 
81,232

 
82,316

Adjusted EBITDA
$
272,628

 
$
312,906

 
$
534,014

 
$
563,181

 
$
584,145










nflxlogo2015a16.jpg
13