Netflix, Inc. is the world’s leading internet television network with over 93 million streaming members in over 190 countries watching more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States, members can receive DVDs delivered quickly to their homes. Netflix is a pioneer in the internet delivery of TV shows and movies, launching streaming services in 2007. Since this launch, they 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, they have experienced growing consumer acceptance of, and interest in, the delivery of TV shows and movies directly over the internet. Their core strategy is to grow their streaming membership business globally within the parameters of their profit margin targets. Netflix is continuously improving their members' experience by expanding their streaming content with a focus on a programming mix of content that delights their members. In addition, they are perpetually enhancing their user interface and extending their streaming service to more internet-connected screens. Their members can now download a selection of titles for offline viewing. They continue to grow their streaming service both domestically and internationally. They began their international expansion with Canada in 2010 and have since launched their service globally, with the exception of The People's Republic of China and territories where U.S. companies are not allowed to operate. They have also expanded their streaming content offering to include more exclusive and original programming, including several Emmy, Golden Globe and Academy Award nominated original series and documentaries. Their original programming increasingly includes content that they produce.
This financial statement analysis of Netflix, Inc. encompasses the years ending December 31 of 2014, 2015 and 2016. Financial data was gathered from the 2012, 2013, 2014, 2015 and 2016 10-K filings with the Securities and Exchange Commission (SEC). Additional data was also taken from the company’s website: https://www.netflix.com. This financial analysis does not perform any comparative analysis to Netflix competitors such as Hulu (privately held), Redbox (privately held), or Amazon (AMZN). Although these competitors are in the home entertainment business, their business models are extremely on the opposite ends to perform a fair comparison. This analysis will examine Netflix financial data solely from the viewpoint of how the financial industry interprets financial data, such as ratios and the effects of the financial results on the overall performance of the company. This paper will examine selected equity, profitability, liquidity, and efficiency ratios, and their relationship to the company’s financial statements – Income statement, Balance Sheet, and Cash Flow statement.
Financial Ratio Analysis
Ratios 2012 2013 2014 2015 2016
Earning Per Share (EPS) is a representation of the portion of a company's earnings that is allocated to each share of common stock. To calculate Earnings per Share, take net income, subtract any dividends for preferred stock, and divide it by the number of average outstanding shares. EPS is usually presented in two different ways: basic and diluted. Fully diluted Earnings per Share takes into account effects of warrants, options, and convertible securities and is generally viewed by analysts as a more accurate measure. Looking at the history of Netflix EPS Data, the company experienced a continuous profit growth between 2009 and 2011. In 2012 the company reported a profit but lower than the profit reported in 2011.
Gross margin is the measure of how well a company controls its costs. It is calculated by dividing a company's profit by its revenues and expressing the result as a percentage. The higher the gross profit margin is, the better the company is thought to control costs. Netflix seems to have its cost under control up until 2012, when the company invested heavily in its international expansion and experienced a decrease in its customer base.
Operating Margin shows how much operating income a company makes on each dollar of sales. The operating profit margin gives detail about the firm's profitability, particularly with regard to cost control. A high operating profit margin means that the company has good cost control and/or that sales are increasing faster than costs, which is the optimal situation for the company. Netflix cost seems to be increasing at a higher rate than its revenue, which explains its very low operating margin. The company needs to get its costs under control.
Net Profit Margin is the ratio of net profits to revenues for a company or business segment – that shows how much of each dollar earned by the company is translated into profits. Net profit margin indicates how well the company converts sales into profits after all expenses are subtracted out. Companies that generate greater profit per dollar of sales are more efficient.
The Cash Flow Margin is a measure of how efficiently a company converts its sales dollars to cash. Since expenses and purchases of assets are paid from cash, this is an extremely useful and important profitability ratio. The higher the cash flow percentage, the more cash available from sales. Netflix cash flow margin has decreased from 2009 to 2013. From the cash flow statement, the company operating income significantly reduced due to “Other Non- Cash Items”. Other Non-Cash items include excess tax benefit from stock- based compensation, and deferred taxes. For purposes of this analysis, emphasis will be placed on the tax benefit from stock-based compensation. When stock compensation is initially awarded, the company expenses the FMV of the compensation on the income statement. If the stock compensation increases in value from the time it was given to the time it was exercised, the tax deduction will be greater than the initial GAAP deduction on the books, and this results in lower taxes, and thus an excess tax benefit. However, since this is essentially an equity transaction, it is removed from the operating section of the cash flow statement, and added to the financing section. The financing section of the cash flow statement accurately added back this non-cash transaction.
Cash Ratio is the most stringent and conservative of the three short-term liquidity ratio. It only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations. It also ignores inventory and receivables, as there are no assurances that these two accounts can be converted to cash in a timely matter to meet current liabilities. Cash flow liquidity is determined by taking cash, marketable securities, and cash flow from operations and dividing that sum by current liabilities. Netflix had a cash flow liquidity ratio of 1.42 for 2009, .90 for 2010, .65 for 2011, .45 for 2012, and .56 for 2013.
The decreases from 2009 to 2012 for Netflix are because of increases in its current liabilities. Cash flow from operations decreased by 15% between 2009 and 2010, increased by 15% between 2010 and 2011, decreased by 93% between 2011 and 2012, and increased 326% between 2012 and 2013. Increases in cash flow are due mainly to increases in earnings (net income). However, these increases are usually offset by the increased current liabilities which cause the cash flow ratio to decrease. This ratio shows that Netflix has enough cash and cash equivalents to pay off its short-term obligations if necessary.
Debt to Equity Ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. It also shows the extent to which shareholders' equity can fulfill a company's obligations to creditors in the event of liquidation. Debt to Equity is calculated by dividing the Total Debt of a company by its Equity. If the debt exceeds equity of a company then the creditors have more stakes in a firm than the stockholders. In other words, Debt to Equity ratio provides analysts with insights about composition of both equity and debt, and its influence on the valuation of the company. High Debt to Equity ratio typically indicates that a firm has been borrowing aggressive to finance its growth and as a result may experience a burden of additional interest expense. This may reduce earnings or future growth. On the other hand small debt to equity ratio may indicate that a company is not taking enough advantage from financial leverage. In 2009, Netflix had debt to equity ratio of 2.41; meaning for every $1 (dollar) of Netflix owned by the shareholders, Netflix owes $2.41 to its creditors. The debt to equity ratio decreased from 2009 to 2010, but increased between 2010 to 2012 figure. Netflix liabilities have constantly exceeded its equity, which means that the company has been borrowing to finance its growth. However the interest expense does not seem to be in line with increase total liabilities. The interest expense increased by 233% in 2010, and total liabilities increased by only 44% in the same period. The interest expense remained the same in 2011 and 2012 from the 2010 figure. Total Liabilities increased 251% and 33% in 2011 and 2012. The company seems to be recording non-interest bearing liabilities. According to the 2012, and 2013 10K, Netflix recorded Lease Financing Obligations, unrecognized tax benefits, and penalties and interest related to Unrecognized tax benefits as Liabilities. The recognition of these non-interest bearing items as liabilities explains why interest expense remains stagnant but liabilities are increasing.
Based on the financials of Netflix, the company strength seems to be its financial viability. Netflix has generated strong increases in revenue and net income. Between 2009 and 2010, the company had an increase of net income of 38.79%. Revenues and net income have continued to increase in the first quarter of 2010 and up to 2013. With Netflix revenue and income on the upward movement, the company boasted strong profitability ratios. The company has lease obligations for its properties, but there are no long-term debt notes that are the responsibility of the company. The company stock price is strong and has increased in 298% between 2012 and 2013. This stock phenomenon has given the company added avenue for raising capital. Analyst ratings of the stock vary from buy to sell, but it has a Stock Scouter score of 7 out of a possible 10.
Although Netflix can be seen as financially viable, there are weaknesses that should be considered. There are three potential weaknesses that should be considered. First, Netflix does not pay dividends to its shareholders which could be effect capital as failing to pay dividends for such a long time could be a deterrent for potential investors. As of January 30, 2014, there were approximately 215 stockholders of Netflix’s common stock. The company have not declared or paid any cash dividends, and as of December 31st 2013, the company had no intention of paying any cash dividends in the foreseeable future. Second, its equity has increased from 2009 to 2013, but the company liabilities far exceeds its equity, which means that the company is financing its operations on debt more than it does via equity. This in itself could also be a positive as it shows that the company is taking advantage of its financial leverage. Lastly, Netflix current and cash ratios have been decreasing over the period of 2009 to 2013, which can be seen as a potential problem. For example, its current ratio is still strong at 1.42, but it decreased from 1.49 in 2011
to 1.34 in 2012. The company could face liquidity issues if the decreases continue at the same rate.
...(download the rest of the essay above)