Netflix, Inc.

[Pages:41]UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020 OR

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

(Address of principal executive offices)

(408) 540-3700

(Registrant's telephone number, including area code)

77-0467272

(I.R.S. Employer Identification Number)

95032

(Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common stock, par value $0.001 per share

Trading Symbol(s)

NFLX

Name of each exchange on which registered

NASDAQ Global Select Market

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 No

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 No

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 the 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

Non-accelerated filer

Accelerated filer

Smaller reporting company

Emerging growth company

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.

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

As of June 30, 2020, there were 441,015,443 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 Consolidated Statements of Stockholders' Equity 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

2

Page

3 4 5 6 7 8 19 34 34

34 35 35 36 36

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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

NETFLIX, INC.

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

Three Months Ended

June 30, 2020

June 30, 2019

$ 6,148,286 $ 4,923,116

3,643,707

3,005,657

434,370

603,150

435,045

383,233

277,236

224,657

1,357,928

706,419

Six Months Ended

June 30, 2020

June 30, 2019

$ 11,915,977 $ 9,444,108

7,243,408

5,876,271

938,200

1,219,728

888,862

755,997

529,323

426,609

2,316,184

1,165,503

(189,151) (133,175) 1,035,602 315,406 $ 720,196 $

(152,033)

(373,234)

(53,470)

(111,478)

500,916

1,831,472

230,266

402,209

270,650 $ 1,429,263 $

(287,562) 22,634

900,575 285,873 614,702

$

1.63 $

0.62 $

3.25 $

1.41

$

1.59 $

0.60 $

3.15 $

1.36

440,569 453,945

437,587 452,195

439,961 453,220

437,271 452,063

See accompanying notes to the consolidated financial statements. 3

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Net income Other comprehensive income (loss):

Foreign currency translation adjustments Comprehensive income

NETFLIX, INC.

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

$

720,196 $

270,650 $ 1,429,263 $ 614,702

12,982

5,248

(10,551)

(770)

$

733,178 $

275,898 $ 1,418,712 $ 613,932

See accompanying notes to the consolidated financial statements. 4

Table of Contents

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 provided by (used in) operating

activities: Additions to content assets Change in content liabilities Amortization of content assets Depreciation and amortization of property, equipment and intangibles Stock-based compensation expense Other non-cash items Foreign currency remeasurement loss on 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 provided by (used in) operating activities

Cash flows from investing activities: Purchases of property and equipment Change in other assets

Net cash used in investing activities Cash flows from financing activities:

Proceeds from issuance of debt

Debt issuance costs Proceeds from issuance of common stock

Net cash provided by financing activities Effect of exchange rate changes on cash, cash equivalents and restricted cash Net increase 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

Three Months Ended

June 30, 2020

June 30, 2019

Six Months Ended

June 30, 2020

June 30, 2019

$

720,196 $

270,650 $ 1,429,263 $ 614,702

(2,510,782) (108,432) 2,607,159 26,661 104,210 70,301 119,161 223,308

3,066 (112,027) (105,450)

42,508 (38,803) 1,041,076

(141,741) (260)

(142,001)

(3,325,103) (12,414)

2,231,915 25,496 103,848 60,695 61,284 35,519

(5,805,057) 150,513

5,090,544 55,178 201,229 135,749 26,101 269,927

(6,322,849) (27,112)

4,356,601 49,057

205,048 106,403

3,684 42,146

(24,231) (2,674) (26,705) 84,085 (26,119) (543,754)

(124,287) (261,180) 108,741 104,516

(80,249) 1,300,988

(56,307) (127,141) 130,942 131,878

(30,605) (923,553)

(39,584) (10,452) (50,036)

(239,756) (548)

(240,304)

(99,965) (30,174) (130,139)

1,009,464

2,243,196

1,009,464

2,243,196

(7,559)

(18,192)

(7,559)

(18,192)

89,060

21,896

132,754

44,868

1,090,965

2,246,900

1,134,659

2,269,872

11,819

4,998

(59,083)

(16)

2,001,859

1,658,108

2,136,260

1,216,164

5,178,187

3,370,097

5,043,786

3,812,041

$ 7,180,046 $ 5,028,205 $ 7,180,046 $ 5,028,205

See accompanying notes to the consolidated financial statements. 5

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NETFLIX, INC.

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

June 30, 2020

As of

December 31, 2019

Assets

(unaudited)

Current assets:

Cash and cash equivalents

$

7,153,248 $

5,018,437

Other current assets

1,410,891

1,160,067

Total current assets

8,564,139

6,178,504

Content assets, net

25,155,117

24,504,567

Property and equipment, net

751,941

565,221

Other non-current assets

2,704,084

2,727,420

Total assets

$

37,175,281 $

33,975,712

Liabilities and Stockholders' Equity

Current liabilities:

Current content liabilities

$

4,664,733 $

4,413,561

Accounts payable

446,668

674,347

Accrued expenses and other liabilities Deferred revenue

986,595 1,029,261

843,043 924,745

Short-term debt

499,161

--

Total current liabilities

7,626,418

6,855,696

Non-current content liabilities

3,208,164

3,334,323

Long-term debt

15,294,998

14,759,260

Other non-current liabilities Total liabilities

1,710,948 27,840,528

1,444,276 26,393,555

Commitments and contingencies (Note 7)

Stockholders' equity:

Common stock, $0.001 par value; 4,990,000,000 shares authorized at June 30, 2020 and December 31, 2019; 441,015,443 and 438,806,649 issued and outstanding at June 30, 2020 and December 31, 2019, respectively

3,127,813

2,793,929

Accumulated other comprehensive loss

(34,072)

(23,521)

Retained earnings

6,241,012

4,811,749

Total stockholders' equity

9,334,753

7,582,157

Total liabilities and stockholders' equity

$

37,175,281 $

33,975,712

See accompanying notes to the consolidated financial statements. 6

Table of Contents Total stockholders' equity, beginning balances

NETFLIX, INC.

Consolidated Statements of Stockholders' Equity (unaudited)

(in thousands)

Three Months Ended

June 30, 2020

June 30, 2019

$ 8,409,294 $ 5,703,058

Six Months Ended

June 30, 2020

June 30, 2019

$ 7,582,157 $ 5,238,765

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

$ 2,935,532 $ 2,439,773 $ 2,793,929 $ 2,315,988

88,071

22,744

132,655

45,329

104,210

103,848

201,229

205,048

$ 3,127,813 $ 2,566,365 $ 3,127,813 $ 2,566,365

$ (47,054) $ (25,600) $ (23,521) $ (19,582)

12,982

5,248

(10,551)

(770)

$ (34,072) $ (20,352) $ (34,072) $ (20,352)

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

$ 5,520,816 $ 3,288,885 $ 4,811,749 $ 2,942,359

720,196

270,650

1,429,263

614,702

--

--

--

2,474

$ 6,241,012 $ 3,559,535 $ 6,241,012 $ 3,559,535

Total stockholders' equity, ending balances

$ 9,334,753 $ 6,105,548 $ 9,334,753 $ 6,105,548

See accompanying notes to the consolidated financial statements. 7

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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 for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the "SEC") on January 29, 2020. 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 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 for the year ended December 31, 2019. 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 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 201613 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in prior GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The Company adopted ASU 2016-13 in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the recent coronavirus (COVID-19) pandemic on expected credit losses.

2. Revenue Recognition

The Company's primary source of revenues is 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.

The following tables summarize streaming revenue, paid net membership additions (losses), and paid memberships at end of period by region for the three and six months ended June 30, 2020 and June 30, 2019, respectively:

United States and Canada (UCAN)

Revenues Paid net membership additions (losses) Paid memberships at end of period (1)

As of/ Three Months Ended

As of/ Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

(in thousands)

$ 2,839,670 $ 2,501,199 $ 5,542,446 $ 4,758,050

2,935

(132)

5,242

1,744

72,904

66,501

72,904

66,501

8

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