NetFlix 2014 Annual Report Download

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NETFLIX INC
FORM 10-K
(Annual Report)
Filed 01/29/15 for the Period Ending 12/31/14
Address 100 WINCHESTER CIRCLE
.
LOS GATOS, CA 95032
Telephone 408-540-3700
CIK 0001065280
Symbol NFLX
SIC Code 7841 - Video Tape Rental
Industry Broadcasting & Cable TV
Sector Services
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2015, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ... INC FORM 10-K (Annual Report) Filed 01/29/15 for the Period Ending 12/31/14 Address 100 WINCHESTER CIRCLE . LOS GATOS, CA 95032 408-540-3700 0001065280 NFLX 7841 - Video Tape Rental Broadcasting & Cable TV Services 12/31 Telephone CIK Symbol SIC Code Industry Sector Fiscal Year http://www...

  • Page 2
    ... Circle Los Gatos, California 95032 (408) 540-3700 (Registrant's telephone number, including area code) _____ Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, $0.001 par value Name of Exchange on which registered NASDAQ Stock Market LLC (NASDAQ...

  • Page 3
    ... Independence Principal Accounting Fees and Services 35 35 35 35 35 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative...

  • Page 4
    ...both DVDs-by-mail and streaming content to have two separate membership plans. BUSINESS SEGMENTS The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. The Domestic and International streaming segments derive revenues from monthly membership fees for...

  • Page 5
    ... financial information to our investors using our investor relations website ( http://ir.netflix.com ), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with our members and the public about our company, our services...

  • Page 6
    ...-based video offerings. Several of these competitors have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to product...

  • Page 7
    .... We utilize a broad mix of marketing and public relations programs, including social media sites such as Facebook and Twitter, to promote our service to potential new members. We may limit or discontinue use or support of certain marketing sources or activities if advertising rates increase or...

  • Page 8
    ... infringement or otherwise increase our costs. We rely upon a number of partners to make our service available on their devices. We currently offer members the ability to receive streaming content through a host of Internet-connected devices, including TVs, digital video players, television set...

  • Page 9
    ... business operations. We also utilize our own and third-party content delivery networks to help us stream TV shows and movies in high volume to Netflix members over the Internet. Problems faced by us or our third-party Web hosting, "cloud" computing, or content delivery network providers, including...

  • Page 10
    ...credit card numbers, we rely on licensed encryption and authentication technology to secure such information. We take measures to protect against unauthorized intrusion into our members' data. Despite these measures we, our payment processing services or other third party services we use such as AWS...

  • Page 11
    ...of Contents We are subject to payment processing risk Our members pay for our service using a variety of different payment methods, including credit and debit cards, gift subscriptions and direct debit. We rely on internal systems as well as those of third parties to process payment. Acceptance and...

  • Page 12
    ... us to foreign currency exchange rate risk; profit repatriation and other restrictions on the transfer of funds; differing payment processing systems as well as consumer use and acceptance of electronic payment methods, such as payment cards; new and different sources of competition; low usage and...

  • Page 13
    ... operating results and member satisfaction. We rely exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers and to return DVDs to us from our members. Increases in postage delivery rates, including those resulting from changes to policies on the requirements of first class...

  • Page 14
    ... in our stock; and the operating results of our competitors. As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price. Following certain periods of volatility in the market price of our securities, we...

  • Page 15
    ... other offices in various locations, including Beverly Hills, California for global content acquisition, marketing and general and administrative operations and Fremont, California for our DVD operations. We also lease office space in other countries to support international streaming operations. We...

  • Page 16
    ... Securities Market Information Our common stock is traded on the NASDAQ Global Select Market under the symbol "NFLX". The following table sets forth the intraday high and low sales prices per share of our common stock for the periods indicated, as reported by the NASDAQ Global Select Market. 2014...

  • Page 17
    Table of Contents Stock Performance Graph Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities and Exchange Commission, the following information relating to the price performance of our common stock shall not be deemed "filed" with the ...

  • Page 18
    ...7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data . Consolidated Statements of Operations: Year ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share data) Revenues Operating income...

  • Page 19
    15

  • Page 20
    ... internal systems, which utilize industry standard geo-location technology. We offer free-trial memberships to new and certain rejoining members. For inclusion in the definition of a member in the above metrics, a method of payment is required to be provided even during the free-trial period. Total...

  • Page 21
    ... are generally specific to a geographic region and accordingly our international expansion will require us to obtain additional streaming content to support new international markets. Other cost of revenues such as streaming delivery expenses, customer service and payment processing fees tend to...

  • Page 22
    ..., streaming delivery expenses increased by $59.5 million and other costs, such as payment processing fees and customer service call centers, increased $36.6 million due to our growing member base. Marketing expenses increased primarily due to an increase in advertising and public relations spending...

  • Page 23
    ... new streaming content including more exclusive and original programming. In addition, streaming delivery expenses increased by $31.7 million and other costs, such as payment processing fees and customer service call centers, increased $34.8 million due to our growing member base. Marketing expenses...

  • Page 24
    ... in average monthly revenue per paying member resulting from the price increase on our most popular streaming plan and the introduction of the premium plan, offset partially by the impact of exchange rate fluctuations. Average paid international streaming memberships account for 27% of total average...

  • Page 25
    ... DVDs, pay a surcharge ranging from $2 to $4 per month for our most popular plans. The decrease in our domestic DVD revenues was due to a 16% decrease in the average number of paid memberships. The decrease in domestic DVD cost of revenues was primarily due to a $16.0 million decrease in content...

  • Page 26
    ... decrease in delivery expenses resulting from a 19% decrease in the number of DVDs mailed to members. The decrease in shipments was driven by a decline in the number of DVD memberships. Other costs, primarily those associated with content processing and customer service center expenses, decreased...

  • Page 27
    ... in technology and development expenses was primarily the result of a $42.8 million increase in personnel-related costs. These increases are primarily due to increases in employee compensation as well as an 8% growth in average headcount supporting continued improvements in our streaming service and...

  • Page 28
    23

  • Page 29
    ...50% Notes. For further detail see Note 5 of Item 8, Financial Statements and Supplementary Data. Provision for Income Taxes Year Ended December 31, 2014 2013 Change 2014 vs. 2013 (in thousands, except percentages) Provision for income taxes Effective tax rate $ 82,570 $ 24% 58,671 $ 34% 23,899...

  • Page 30
    ... into shares of our common stock. See Note 5 of Item 8, Financial Statements and Supplementary Data for additional information. Our primary uses of cash include content acquisition and licensing, streaming delivery, marketing programs and payroll. Payment terms for certain content agreements require...

  • Page 31
    ...differences include deferred revenue, taxes and semi-annual interest payments on our outstanding debt. Our receivables from members generally settle quickly and deferred revenue is a source of cash flow. Year Ended December 31, 2014 (in thousands) 2013 Net cash provided by operating activities Net...

  • Page 32
    ... other than DVD library of $502.6 million or 24% as well as increased payments associated with higher operating expenses. Operating activities were further impacted by increased payments for streaming delivery, payment processing fees and customer service call centers due to our growing member base...

  • Page 33
    ... of revenues and expenses during the reported periods. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and results of operations, and which require a company to...

  • Page 34
    Table of Contents Streaming Content We license and acquire rights to stream TV shows, movies, and original content to members for unlimited viewing. These rights are for a fixed fee and specify windows of availability. Payment terms for certain content agreements require more upfront cash payments ...

  • Page 35
    ...The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes. We maintain a portfolio of cash equivalents and short-term investments in a variety of securities. These securities are classified as available-for-sale...

  • Page 36
    ...Brazilian Real. Accordingly, changes in exchange rates may negatively affect our revenue and contribution profit (loss) of our International streaming segment as expressed in U.S. dollars. We also have foreign currency risk related to foreign currency transactions and monetary assets and liabilities...

  • Page 37
    ... that our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended...

  • Page 38
    ...may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Netflix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO...

  • Page 39
    Table of Contents Item 9B. None. Other Information 34

  • Page 40
    ... and Related Stockholder Matters Information required by this item is incorporated by reference from information contained under the sections "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual Meeting of...

  • Page 41
    ... Statements: The financial statements are filed as part of this Annual Report on Form 10-K under "Item 8. Financial Statements and Supplementary Data." (2) Financial Statement Schedules: The financial statement schedules are omitted as they are either not applicable or the information required...

  • Page 42
    ... financial information from Netflix, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on January 29, 2015, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012, (ii) Consolidated Statements...

  • Page 43
    ... are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. †Indicates a management contract or compensatory plan 38

  • Page 44
    Table of Contents NETFLIX, INC. INDEX TO FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Consolidated Balance Sheets ...

  • Page 45
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 46
    Table of Contents NETFLIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, 2014 2013 2012 Revenues Cost of revenues Marketing Technology and development General and administrative Operating income Other income (expense): Interest expense ...

  • Page 47
    ... of Contents NETFLIX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year ended December 31, 2014 2013 2012 Net income $ Other comprehensive income (loss): Foreign currency translation adjustments Change in unrealized gains (losses) on available-for-sale securities, net of tax...

  • Page 48
    ..., equipment and intangibles Stock-based compensation expense Excess tax benefits from stock-based compensation Other non-cash items Loss on extinguishment of debt Deferred taxes Changes in operating assets and liabilities: Other current assets Accounts payable Accrued expenses Deferred revenue Other...

  • Page 49
    43

  • Page 50
    ... liabilities Accounts payable Accrued expenses 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: Preferred stock, $0.001 par value; 10,000,000 shares...

  • Page 51
    Table of Contents NETFLIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) Accumulated Other Comprehensive (Loss) Income Retained Earnings Common Stock Shares Amount Additional Paid-in Capital Total Stockholders' Equity Balances as of December 31, 2011 Net...

  • Page 52
    ... transit from payment processors for customer credit card and debit card transactions as cash equivalents. The Company classifies short-term investments, which consist of marketable securities with original maturities in excess of 90 days as available-for-sale. Short-term investments are reported at...

  • Page 53
    Table of Contents Streaming Content The Company licenses and acquires rights to stream TV shows, movies and original content to members for unlimited viewing. These rights are for a fixed fee and specify windows of availability. Payment terms for certain content agreements require more up-front ...

  • Page 54
    ...to the consolidated financial statements for further information regarding income taxes. Foreign Currency The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenues and...

  • Page 55
    ... Consolidated Statements of Cash Flows. 3. Short-term Investments The Company's investment policy is consistent with the definition of available-for-sale securities. The Company does not buy and hold securities principally for the purpose of selling them in the near future. The Company's policy is...

  • Page 56
    ... measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy level assigned to each security in the Company's available-for-sale portfolio and cash equivalents is based on its assessment of the transparency and...

  • Page 57
    50

  • Page 58
    Table of Contents vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. The Company's procedures include controls to ensure that appropriate fair values are recorded, such as ...

  • Page 59
    ... the following: As of December 31, 2014 (in thousands) 2013 Estimated Useful Lives (in Years) Information technology assets Furniture and fixtures Building Leasehold improvements DVD operations equipment Capital work-in-progress Property and equipment, gross Less: Accumulated depreciation Property...

  • Page 60
    ... of the Company. Interest is payable semi-annually at a rate of 5.375% per annum on February 1 and August 1 of each year, commencing on August 1, 2013. The 5.375% Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in...

  • Page 61
    ... Los Gatos, California headquarters site required the Company's involvement in the construction funding of the buildings, the Company is the "deemed owner" (for accounting purposes only) of these buildings. Accordingly, the Company recorded an asset of $40.7 million , representing the total costs...

  • Page 62
    ... of the Company's current and former officers and directors breached their fiduciary duties, issued false and misleading statements primarily regarding the Company's streaming business, violated accounting rules concerning segment reporting, violated provisions of the California Corporations 55

  • Page 63
    ... inflated prices to the detriment of the Company and its shareholders while contemporaneously selling personally held Company stock. The Company filed a demurrer to the consolidated complaint and a motion to stay the derivative litigation in favor of the related federal securities class action on...

  • Page 64
    ... under the 2002 Stock Plan expired. A summary of the activities related to the Company's stock option plans is as follows: Weighted- Average Remaining Contractual Term (in Years) Options Outstanding Shares Available for Grant Number of Shares Weighted- Average Exercise Price Aggregate Intrinsic...

  • Page 65
    .... In valuing shares issued under the Company's employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. The Company does not anticipate paying any cash dividends in the foreseeable...

  • Page 66
    ...available-for-sale securities. These reclassifications impacted "Interest and other income (expense)" on the Consolidated Statements of Operations. 10. Income Taxes Income before provision for income taxes was as follows: Year Ended December 31, 2014 2013 (in thousands) 2012 United States Foreign...

  • Page 67
    ...deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of December 31, 2014 and 2013 , it...

  • Page 68

  • Page 69
    ... statutory limits set by the Internal Revenue Service. The Company matches employee contributions at the discretion of the Board. During 2014 , 2013 and 2012 , the Company's matching contributions totaled $8.3 million , $6.5 million and $5.2 million , respectively. 12. Segment Information Beginning...

  • Page 70
    ...segment information for the year ended December 31, 2014: As of/Year ended December 31, 2014 Domestic Streaming International Streaming (in thousands) Domestic DVD Consolidated Total members at end of period (1) Revenues Cost of revenues Marketing Contribution profit (loss) Other operating expenses...

  • Page 71
    ...segment information for the year ended December 31, 2013: As of/Year ended December 31, 2013 Domestic Streaming International Streaming (in thousands) Domestic DVD Consolidated Total members at end of period (1) Revenues Cost of revenues Marketing Contribution profit (loss) Other operating expenses...

  • Page 72
    63

  • Page 73
    ... of sign up as determined by the Company's internal systems, which utilize industry standard geo-location technology. The Company offers free-trial memberships to new and certain rejoining members. For inclusion in the definition of a member in the above metrics, a method of payment is required to...

  • Page 74
    Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: January 29, 2015 By: / S / R EED H ...

  • Page 75
    ... requirements of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed ...Officer and Director (principal executive officer) January 29, 2015 Chief Financial Officer (principal financial and accounting officer) January 29, 2015 / S/ Director January 29, 2015...

  • Page 76
    ... financial information from Netflix, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on January 29, 2015, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012, (ii) Consolidated Statements...

  • Page 77
    ... are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. †Indicates a management contract or compensatory plan 68

  • Page 78
    Exhibit 21.1 NETFLIX, INC. LIST OF SIGNIFICANT SUBSIDIARIES* Legal Name Jurisdiction Percent Owned Netflix Luxembourg S.a r.l. Netflix Streaming Services, Inc. Netflix Entretenimento Brasil Ltda. Luxembourg United States Brazil 100% 100% 100% * Pursuant to Item 601(b)(21)(ii) of Regulation S-K, ...

  • Page 79
    ... stock issued upon conversion of Zero Coupon Convertible Notes; of Netflix, Inc. of our reports dated January 29, 2015, with respect to the consolidated financial statements of Netflix, Inc. and the effectiveness of internal control over financial reporting of Netflix, Inc. included in this Annual...

  • Page 80
    ... financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and...

  • Page 81
    ... financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and...

  • Page 82
    ... 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Netflix, Inc. Dated: January 29, 2015 By...