Netflix Financials free essay sample

The Evolution of the Netflix Empire Netflix has quickly become a household name by saturating the market with a new age way to rent movies. Established in 1998, Netflix geared its business to provide consumers with quick and easy access to their favorite movies without the need to leave their homes. As the business developed and other popular sites, such as YouTube, began to gain popularity Netflix entered the market of streaming online content. During the infancy of their instant service Netflix still relied heavily on mailing DVDs to offer their customers a wider range of movies and TV shows. However, as their steaming library grew the mindset of the company began to shift. As they transitioned away from their mailing movies, key business decisions were made that caused many to question the future of the company. The adaptation of Netflix into the era of instant movie viewing can best be described by analyzing the time period from 2010-2012. We will write a custom essay sample on Netflix Financials or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The â€Å"Video Store† Era From early 2010 to the close of the year, Netflix saw growth across many aspects of the company, including stock price, profit, and subscribers. As shown in the stock price graph below, Netflix’s per share value increased from approximately $53 to $175, an increase of more than 200%. This can be attributed to a growth in popularity as the company attracted nearly 8 million new subscribers, which led to $2. 1 billion in total revenue as seen on the income statement. Continuing with the same report, accounting for the cost of goods sold, Netflix had a gross profit of $805 million, leading to a net income of roughly $160 million. Looking at the statement of cash flows for the year, there are a few major components that stand out. Over the course of the year, they bought back about $90 million dollars worth of their own stock. This makes sense due to the large increase in price. It would have been a safe move to invest in themselves and keep their cash internal. This pairs with the investments section of roughly 30 million, substantially different have the coming years. These compared with the net income mentioned above led to a change in cash flow of $60 million, again less significant than in the coming years. From the balance sheet, total liabilities were $692 million. The largest portion of this was Current Content Liabilities ($169 million), or the money that they had to pay to copyright holders to have access to their products and long term debt ($200 million). Total shareholder equity was $290 million. Publicized changes that Netflix made during the year helped forecast the growth of the steaming content portion of the business. They began to move to a wider variety of media by offering their service through popular gaming consoles, like the Wii and PlayStation Network, and tablets, most notably the iPad. Also by expanding their territory to Canada, Netflix began to become a global company. In 2010 Netflix was able to ride the wave of your popular DVD rental business, which allowed them the opportunity to look at expanding and preparing their streaming content. Being the number one, and practically only key company in this market helped them become a thriving business. As other rental companies, such as Blockbuster, failed to adapt, they were forced to close stores leading to a higher demand for an easy way to rent movies. These numbers and the trend of the company would set the stage for a booming first half of 2011. Riding the Wave of Streaming Content Following the promising year Netflix had in 2010, the company was well situated to become a force to be reckoned with in the coming year. They did anything but disappoint, at least in the first two quarters that is. Netflix opened the first half of the 2011 with a strong presence. In the first quarter alone, Netflix added roughly 45. 5% to the number of subscribers they had gained in the entire year of 2010. This increased customer base could be attributed to the large investment the company had put into expanding their streaming content library. They had invested a total of $805 million in the first two quarters, which was approximately double the amount, $406 million, the company had invested in their streaming content the previous year. With Netflix thriving and gaining so many new customers while still investing so much into their streaming segment of the business, it would be expected that the company would also invest in their physical DVD content as well. However, this was not the case. In the first two quarters of 2011, Netflix had invested less and less, $22 million and $19 million, respectively, in their DVD content, compared to the $32 million the company had invested in the fourth quarter of 2010. Following the additions, or lack thereof, in their streaming and DVD content, Netflix had increased their cost of revenues in the first two quarters by roughly 129%, when compared to their average cost of revenues for 2010. However, with the increased customer base, resulting in increased revenue in each quarter of $719 million and $789 million, respectively, Netflix was still able to prove its dominance in their field by continuing to increase their net income in the first two quarters to both $60 million and $68 million, respectively. Netflix exhibited such promise coming out of a good year in 2010 and a strong first two quarters; Netflix was clearly taking a stance in the market as one of the only providers of its type. This was illustrated by the increased customer base as well as in the stock market. In the first half of 2011, the stock gained as much value ($125 per share) as it did in all of 2010. Again, this was predicated on the potential growth of revenues from streaming videos. Following such a strong opening, the financials during 2011 show that the company decided to focus on growing the streaming side of the business. Investment in the DVD library dropped by 30% while investment in the streaming library increased by 471%. This counterintuitive shift in focus for the company signaled that there was clearly more in store behind the scenes that would ultimately send shockwaves through the company that would be evident in the financial statements in the latter half of the year. One Fateful Decision The second half of 2011 was disastrous for Netflix’s stockholders. Through 2010 and the first half of 2011, Netflix invested nearly ten times more in streaming content than DVD content ($1. 2 billion vs. $165 million). This pattern of investment along with comments from the CEO, Reed Hastings, such as DVD by mail may not last forever, but we want it to last as long as possible† made Netflix’s growth plans clear. On July 12th 2011, Netflix publically confirmed these plans and announced that it would spin off the DVD rental into its own business, called Qwikster. Under the two company proposal, customers who wanted to be able to rent DVDs and have access to streaming video would need to subscribe to each service/company individually, with a related increase in cost. To say that customers were not pleased with this plan would be a significant understatement. The decision was a public relations nightmare and customers began deserting the company. By early October 2011, the stock price had dropped approximately $170 per share (to $130) and in mid-October, Netflix announced that it had lost 800,000 subscribers. Also in mid-October, Netflix announced the cancellation of the plans to spin off into two different companies, but the damage had been done. With the huge loss of subscribers and the corresponding loss of company reputation, future growth would take place at a much slower rate than initially anticipated. Since stock price is based off of future growth, it dropped 78% from a high of $299 per share at the start of July to $70 per share by the end of 2011, even though the company would have its best year ever in terms of retained earnings, operating income and stockholder equity. In 2011, retained earnings increased 78% (from $238 million to $423 million), operating income increased 32% (from $284 million to $376 million) and stockholder equity increased 122% (from $290 million to $642 million). It is worth noting that by the end of 2011, Netflix had replaced or won back 75% of the people that had left after the announcement, adding 600,000 subscribers in the fourth quarter and ending the year with a 25% increase in subscribers over 2010 (24. 4 million vs. 19. 5 million). It is also worth noting that in spite of the Qwikster set-back, Netflix continued to concentrate on increasing its streaming content library, investing $1. 5 billion into it in the second half of 2011 vs. $44 million invested in DVDs over the same period. The analysis of the 2011 financial statements yielded one more observation that is worth mentioning. Specifically, the exceptionally strong reported growth in stockholder equity was a little misleading. During the analysis, it was noted that about $200 million in new stock was issued. It seemed very unusual that a company experiencing the problems that Netflix was, would issue new stock for sale. Further digging into the company report, and comparison to the Statement of Cash Flows showed that at the end of 2011, the company discontinued the employee stock purchase plan (even though it had a year left). In the fourth quarter of 2011, all stock that remained in the plan (about $200 million dollars’ worth), was issued as a new public offering. Also in the fourth quarter of 2011, Netflix offered corporate bonds in the amount of $200 million and used these proceeds to buy all of the stock that was in the employee plan. It can be inferred that Netflix did this so as to not release new shares into the market and further dilute and decrease the value of shares that were already down. It is further assumed that Netflix borrowed the money (issuing bonds) because they felt that they could earn more interest investing the cash that they had elsewhere, than they would pay on the bonds. The end result is that the additional $200 million in borrowed money went into stockholder equity, i. . $200 million in new stock + $200 million in bonds $200 million to buy the new stock = $200 million in stockholder equity. However, this money will need to be repaid. If it was not included in the stockholder equity line, the increase would have been 52% instead of the actual 122%. The Recovery of the Comeback Kid In the first quarter of 2012, Netfl ix suffered its first quarterly loss in seven years ($4. 6 million). However, this was due to rising licensing fees and the bill for an international expansion, and the first-quarter setback was far smaller than analyst expected. And as the company’s subscriber growth accelerated during the first three months of the year, results were beginning to show signs that the company was recovering from the price-hike backlash. By the midway point of 2012, nearly a year after the price increase announcement, subscriber growth had returned, but the stock price remained below its peak price in 2011 of $299. Netflix and other investors had taken a very conservative approach; a â€Å"wait and see† attitude to gage how the future would unfold. And this cautious investing strategy remained up until the announcement of Netflix’s 2012 fourth quarter financial on January 23, 2013. After the announcement, investors were able to witness the company’s quarterly revenue, which was much higher than expected. Wall Street analysts projected revenues of $934 million for Q4 2012, and Netflix had announced previously that it was expecting a loss for the December quarter. However, Netflix outperformed the expectations of analysts with quarter revenues reaching $945 million. And even though the revenue growth declined from a year ago, the companys stock rose 42% on the first day after the announcement. Out-performance in the domestic and international streaming segments was the reason for the company exceeding forecasted totals. The company continued to increase its streaming capabilities, entering into an agreement with Walt Disney to stream 1st run animation and live action movies. Additionally, they increased their international presence, expanding into England, Ireland, Norway, Denmark, Sweden and Finland. Though recent results have instilled confidence in Netflix investors, it must be noted that the consequences of the decisions of 2011 were felt in 2012. Retained earnings increased 4% (from $422 million to $440 million) and stockholder equity increased 16% (from $643 mil to $745 million). Both indicators show growth, but at a much slower pace than previous years. And, more importantly, at a much slower pace than what is expected by investors. Further, the exercise of options by employees dropped 71% (from 0. 9 million to 0. 2 million) and the company did not buy back any stock even though it had funds set aside to do so. With all of this, the stock price, up until the Q4 announcement, remained essentially flat, trading in a range of $50 per share to $130 per share and eventually closing at $90 per share. Investors chose to wait to see if the customer base that had supported Netflix so strongly early on would come back. By adding nearly 10 million global streaming members in 2012, for a total of over 33 million global streaming members, Netflix ended the year with revenues of over $3. 6 billion. This result bested 2011’s annual revenue of $3. 2 billion, an increase of over 12%. However, the total net income for the year was only $17. 1 million, compared to $226 million in 2011. The decrease in net income was primarily due to a 29% increase in cost of revenues ($596 million), which composed mainly of licensing fees and streaming content obligations. From 2011 to 2012, the total amortization of streaming content library increased by $892 million, and was a major portion of Netflix’s 2012 cost of revenues. Because of the decrease in operating income; the earning per share, return on equity and return on assets, each decreased by over 90% from the previous year. But even with the company’s 2012 decrease in net income, the price to book ratio increase by 533% from 2011 to 2012, indicating that a higher earnings growth is expected in the future. Conclusion