NetFlix 2015 Annual Report Download - page 34

Free Cash Flow
We define free cash flow as cash (used in) provided by operating and investing activities excluding the non-
operational cash flows from purchases, maturities and sales of short-term investments. We believe free cash flow
is an important liquidity metric because it measures, during a given period, the amount of cash generated that is
available to repay debt obligations, make investments and for certain other activities. Free cash flow is
considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net
income, operating income, cash flow (used in) provided by operating activities, or any other measure of financial
performance or liquidity presented in accordance with GAAP.
In assessing liquidity in relation to our results of operations, we compare free cash flow to net income,
noting that the three major recurring differences are excess content payments over expense, non-cash stock-based
compensation expense and other working capital differences. The excess content payments over expense is
variable based on the payment terms of our content agreements and is expected to increase as we enter into more
agreements with upfront cash payments, such as licensing and production of original content. In 2015, the ratio
of content payments over content expense was between 1.3 and 1.4. Working capital 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,
2015 2014 2013
(in thousands)
Net cash (used in) provided by operating activities ........ $ (749,439) $ 16,483 $ 97,831
Net cash used in investing activities .................... (179,192) (42,866) (255,968)
Net cash provided by financing activities ............... 1,640,277 541,712 476,264
Non-GAAP free cash flow reconciliation:
Net cash (used in) provided by operating activities ........ (749,439) 16,483 97,831
Acquisition of DVD content assets .................... (77,958) (74,790) (65,927)
Purchases of property and equipment ................... (91,248) (69,726) (54,143)
Other assets ....................................... (1,912) 1,334 5,939
Non-GAAP free cash flow ........................... $ (920,557) $(126,699) $ (16,300)
Year ended December 31, 2015 as compared to the year ended December 31, 2014
Cash provided by operating activities decreased $765.9 million resulting in net cash used in operating
activities of $749.4 million for the year ended December 31, 2015. The significant net cash used in operations is
due primarily to the increase in investments in streaming content that requires more upfront payments. The
payments for content excluding DVD assets increased $1,374.8 million or 40%. In addition we had increased
payments associated with higher operating expenses. The increased use of cash was partially offset by a $1,274.9
million or 23% increase in revenues.
Cash used in investing activities increased $136.3 million, primarily due to a decrease of $108.4 million in
the proceeds from sales and maturities of short-term investments, net of purchases. In addition, purchases of
property and equipment increased by $21.5 million.
Cash provided by financing activities increased $1,098.6 million primarily due to the $1,482.4 million net
proceeds from the issuance of the 5.50% Notes and the 5.875% Notes in the year ended December 31, 2015 as
compared to the $392.9 million net proceeds from the issuance of the 5.750% Notes in the year ended
December 31, 2014.
Free cash flow was $1,043.2 million lower than net income for the year ended December 31, 2015 primarily
due to $1,209.4 million of content cash payments over expense partially offset by $124.7 million of non-cash
stock-based compensation expense and $41.5 million of favorable other working capital differences.
30