Netflix, Inc.

[Pages:35]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 March 31, 2019

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

(State or other jurisdiction of incorporation or organization)

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)

77-0467272

(I.R.S. Employer Identification Number)

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 every Interactive Data File required to be submitted 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 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

Non-accelerated filer

o

Accelerated filer

o

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 March 31, 2019 , there were 437,191,891 shares of the registrant's common stock, par value $0.001, outstanding.

Table of Contents

Item 1.

Consolidated Financial Statements

Part I. Financial Information

Item 2. Item 3. Item 4.

Item 1. Item 1A. Item 6. Exhibit Index Signatures

Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Consolidated Balance Sheets Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Controls and Procedures

Part II. Other Information Legal Proceedings Risk Factors Exhibits

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3 4 5 6 8 20 30 30

30 31 31 32 32

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NETFLIX, INC.

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

Revenues Cost of revenues Marketing Technology and development General and administrative

Operating income Other income (expense):

Interest expense Interest and other income (expense) Income before income taxes Provision for income taxes Net income

Earnings per share: Basic Diluted

Weighted-average common shares outstanding: Basic Diluted

Three Months Ended

March 31, 2019

March 31, 2018

$ 4,520,992 $ 3,700,856

2,870,614

2,300,579

616,578

536,777

372,764

282,310

201,952

134,612

459,084

446,578

(135,529) 76,104 399,659 55,607

$ 344,052 $

(81,219) (65,743) 299,616

9,492 290,124

$

0.79 $

0.67

$

0.76 $

0.64

436,947 451,922

434,174 450,359

See accompanying notes to the consolidated financial statements. 3

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NETFLIX, INC.

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

Net income Other comprehensive income (loss):

Foreign currency translation adjustments Comprehensive income

Three Months Ended

March 31, 2019

March 31, 2018

$

344,052 $

290,124

(6,018)

24,821

$

338,034 $

314,945

See accompanying notes to the consolidated financial statements. 4

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NETFLIX, INC.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used in operating activities:

Additions to streaming content assets Change in streaming content liabilities Amortization of streaming content assets Amortization of DVD content assets Depreciation and amortization of property, equipment and intangibles Stock-based compensation expense Other non-cash items Foreign currency remeasurement loss (gain) on long-term debt Deferred taxes Changes in operating assets and liabilities:

Other current assets Accounts payable Accrued expenses and other liabilities Deferred revenue Other non-current assets and liabilities

Net cash used in operating activities Cash flows from investing activities: Acquisition of DVD content assets Purchases of property and equipment Change in other assets

Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of common stock Other financing activities

Net cash provided by financing activities Effect of exchange rate changes on cash, cash equivalents, and restricted cash Net decrease in cash, cash equivalents, and restricted cash Cash, cash equivalents and restricted cash at beginning of period Cash, cash equivalents and restricted cash at end of period

See accompanying notes to the consolidated financial statements.

5

Three Months Ended

March 31, 2019

March 31, 2018

$

344,052 $ 290,124

(2,997,746) (14,698)

2,124,686 8,509 23,561

101,200 37,199 (57,600) 6,627

(2,986,747) 378,885

1,748,844 11,134 19,041 68,395 8,209 41,080 (22,049)

(32,076) (124,467) 157,647

47,793 (4,486) (379,799)

(55,905) 74,083 119,049 55,270 13,830 (236,757)

(9,170) (60,381) (10,552) (80,103)

(10,796) (37,170) (1,786) (49,752)

22,972

56,335

--

(321)

22,972

56,014

(5,014)

7,177

(441,944)

(223,318)

3,812,041

2,822,795

$ 3,370,097 $ 2,599,477

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NETFLIX, INC.

Consolidated Balance Sheets (in thousands, except share and par value data)

Assets

Current assets:

Cash and cash equivalents

$

Current content assets, net

Other current assets

Total current assets

Non-current content assets, net

Property and equipment, net

Other non-current assets

Total assets

$

Liabilities and Stockholders' Equity

Current liabilities:

Current content liabilities

$

Accounts payable

Accrued expenses and other liabilities

Deferred revenue

Total current liabilities

Non-current content liabilities

Long-term debt

Other non-current liabilities

Total liabilities

Commitments and contingencies (Note 6)

Stockholders' equity:

Common stock, $0.001 par value; 4,990,000,000 shares authorized at March 31, 2019 and December 31, 2018; 437,191,891 and 436,598,597 issued and outstanding at March 31, 2019 and December 31, 2018, respectively

Accumulated other comprehensive loss

Retained earnings

Total stockholders' equity

Total liabilities and stockholders' equity

$

March 31, 2019

(unaudited)

As of

December 31, 2018

3,348,557 $ --

820,350 4,168,907 20,888,785

434,372 1,726,568 27,218,632 $

3,794,483 5,151,186

748,466 9,694,135 14,960,954

418,281 901,030 25,974,400

4,863,351 $ 439,496 746,268 808,692

6,857,807 3,560,364 10,305,023

792,380 21,515,574

4,686,019 562,985 477,417 760,899

6,487,320 3,759,026 10,360,058

129,231 20,735,635

2,439,773 (25,600)

3,288,885 5,703,058 27,218,632 $

2,315,988 (19,582)

2,942,359 5,238,765 25,974,400

See accompanying notes to the consolidated financial statements. 6

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NETFLIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)

Total stockholders' equity, beginning balances

Common stock and additional paid-in capital: Beginning balances Issuance of common stock upon exercise of options Stock-based compensation expense Ending balance

Accumulated other comprehensive income (loss): Beginning balances Other comprehensive income Ending balance

Retained earnings: Beginning balances Net income Adoption of ASU 2016-02, Leases (Topic 842) Ending balances

Total stockholders' equity, ending balances

Three Months Ended

March 31, 2019

March 31, 2018

$ 5,238,765 $ 3,581,956

$ 2,315,988 $ 1,871,396

22,585

55,434

101,200

68,395

$ 2,439,773 $ 1,995,225

$ (19,582) $ (20,557)

(6,018)

24,821

$ (25,600) $ 4,264

$ 2,942,359 $ 1,731,117

344,052

290,124

2,474

--

$ 3,288,885 $ 2,021,241

$ 5,703,058 $ 4,020,730

7

Table of Contents

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, 2018 filed with the Securities and Exchange Commission (the "SEC") on January 29, 2019 and February 8, 2019 , respectively. 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, as amended by Form 10-K/A, for the year ended December 31, 2018 . Interim results are not necessarily indicative of the results for a full year.

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, as amended by Form 10-K/A, for the year ended December 31, 2018.

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board ("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 prior 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. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $743 million , lease liabilities for operating leases of approximately $813 million and a cumulative-effect adjustment on retained earnings of $2 million on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations. See Note 4 for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

In March 2019, the FASB issued ASU 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials , in order to align the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization. ASU 2019-02 also requires that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively. In addition, ASU 2019-02 requires that an entity test films and license agreements for program material for impairment at a film group level when the film or license agreements are predominantly monetized with other films and license agreements. ASU 2019-02 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company early adopted ASU 2019-02 in the first quarter of 2019 and as such has included all content assets (licensed and produced) as "Non-current content assets, net" on its Consolidated Balance Sheets, beginning with the period of adoption. There was no material impact to its Consolidated Statements of Operations. See the Company's updated Streaming Content policy below for further details.

Streaming Content (Effective January 1, 2019)

The Company acquires, licenses and produces content, including original programming, in order to offer members unlimited viewing of TV series and films. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to streaming assets and the changes in related liabilities, are classified within "Net cash used in operating activities" on the Consolidated Statements of Cash Flows.

The Company recognizes content assets (licensed and produced) as "Non-current content assets, net" on the Consolidated Balance Sheets. For licenses, the Company capitalizes the fee per title and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known and the title is accepted and available for streaming. For productions, the Company capitalizes

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