Annual Report Netflix, Inc. Don Vu ACG2021.001

Annual Report Netflix, Inc. Don Vu ACG2021.001

Executive Summary Netflix, Inc. is a popular subscription service that provides streaming movies and TV shows over the Internet and delivers DVD rentals. It is one of frontrunners for streaming entertainment because of its large library content. The business has been through a rough patch lately when it lost an estimated one million subscribers after they increased the price of DVD rentals and Internet streaming services and separated their services into two websites. After Netflix s announcement of the change, their stock prices tumbled to about one-third of the original price. With the new pricing plan and reorganization, the company hopes to develop each of their services better, such as expanding their libraries. They also began reaching out to international markets such as Canada, Mexico, the Caribbean, Central America, and South America. They plan to expand to rest of the world in the future. 2010 Annual Report and Financial Statements

Introduction Chief Executive Officer: Reed Hastings Home Office Location: 100 Winchester Circle Los Gatos, California, USA 95032 Ending Date of Latest Fiscal Year: December 31, 2010 Subscription service for streaming TV shows and movies over the internet, and for DVD/Blu-Ray rentals through mail delivery. The streaming service is supported on many devices. Provides service to USA and Canada. Slowly expanding to Mexico, the Caribbean, Central America, and South America.

Audit Report Financial statements were audited by KPMG LLP. KPMG LLP concluded that the presentation of the financial statements was fair and are in accordance to US generally accepted accounting principles. They also wrote that the internal control of Netflix, Inc. was effective over financial reporting. This was based on criteria set by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control- Integrated Framework.

Stock Market Information Price of Netflix Inc. s stock as of October 6, 2011 at 4:00 PM ET: $123.24 52-Week Low: $107.63 52-Week High: $304.79 Dividend per share: $0.00 (Netflix, Inc. has not declared any dividends yet.) While the price is still high, it has been decreasing rapidly since the announcement of the subscription price hike. I would recommend stockholders to sell and potential buyers not to buy. July 2010-October 2011

Industry Situation and Company Plans Netflix, Inc. is one of leading services in providing TV shows and movies instantly through Internet streaming. Entertainment through Internet streaming is a relatively new market, which is highly competitive and changing constantly. This emerging market will slowly replace DVD rentals (also a part of Netflix s business). Streaming over the Internet will become a primary provider of entertainment as consumers are more reliant on computers and devices that have Internet connection. Also Internet streaming is convenient and easy for the consumer. Netflix has split up their Internet streaming and DVD rental services into two separate companies. Netflix will provide streaming content while a new subsidiary, Qwikster, will provide DVD and video game rentals through mail. This resulted a 60% price hike for customers who originally had both services. Netflix, Inc. stated that they separated the services in order to focus on improving each of the services separately like obtaining new content.

Industry Situation and Company Plans Netflix, Inc. has an expansion plan to all the other countries in the Americas besides USA and Canada. The business plans to expand to foreign markets overseas in the future. Source 1, Source 2, Source 3

Income Statement Netflix, Inc. uses multistep format. Year Gross Profit Income from Operations Net Income 2010 805,270,000 283,641,000 160,853,000 2009 590,998,000 191,939,000 115,860,000 Difference 214,272,000 91,702,000 44,993,000 Gross profit, income from operations, and net income all increased from 2009 to 2010. There were more revenues in 2010 than in 2009, resulting in an increase in gross profit. Although cost of revenues and operating expenses grew in 2010, income from operations still increased because of the increase in revenue. Income taxes and interest expenses also increased but net income still grew because of more revenue in 2010.

Balance Sheet Year Assets = Liabilities + Stockholders Equity 2010 982,067,000 691,903,000 290,164,000 2009 679,734,000 480,591,000 199,143,000 Difference 302,333,000 211,312,000 91,021,000 Assets, liabilities, and stockholders equity all increased from 2009 to 2010. Assets had the greatest change within the two years. An increase in assets means that Netflix is growing in business. Liabilities increased but it is not a big concern since the company borrowed more money to achieve more growth and increase in assets. Stockholders equity also increased because more people are investing in Netflix, Inc. The new investors recognize that the business is growing.

Statement of Cash Flows Year Net Income Cash Flow from Operations 2010 160,853,000 276,401,000 2009 115,860,000 325,063,000 Cash flow from operations was more than net income in the previous two years. The company is growing as it is investing in acquiring more DVD content for its current library. Netflix, Inc. also invested in equipment and property, and acquisition of intangible assets. In 2010, the primary source of financing was tax benefits from stock-based compensation, and in 2009, it was proceeds from issuance of debt and net of issuance costs. Cash has increased from $134,224,000 (2009) to $194,499,000 (2010).

Accounting Policies Revenue Recognition- The business recognizes revenue ratably from monthly subscription periods. Refunds are revenue reductions. Unrecognized subscriptions and unredeemed gift card subscriptions are counted as deferred revenues. Cash Equivalents and Short-term Investments- Investments in instruments purchased with an original maturity of 90 days or less are considered cash equivalents. Marketable securities with original maturities more than 90 days are considered short-term investments. Content Library- Netflix s content was obtained through DVD purchases and licensing deals for streaming. Streaming content is amortized over their period of availability. Licensing fees for titles that are due within a year but not paid yet are classified as Accounts payable. The portion due beyond a year is classified as Other non-current liabilities. Property and Equipment- These are carried at cost minus accumulated depreciation. Leased buildings are capitalized and included when it did not meet the sale-leaseback criteria.

Accounting Policies Topics of the notes to financial statements Organization and Summary of Significant Accounting Policies Short-term Investments Balance Sheet Components Long-term Debt Commitments and Contingencies Guarantees-Intellectual Property Indemnification Obligations Stockholders' Equity Income Taxes Employee Benefit Plan Related Party Transaction Selected Quarterly Financial Data (Unaudited)

Financial Analysis- Liquidity Ratios Year 2010 2009 Comment Working Capital 252,388,000 183,577,000 The increase in working capital indicates that the company can invest more to increase growth. Current Ratio 1.65 1.81 The current ratio went lower slightly. This means that Netflix, Inc. has more current liabilities in 2010. Receivable Turnover N/A N/A As a subscription service, Netflix, Inc. has no accounts receivable because subscribers prepay for content. It is paid off by the time Netflix, Inc. earns the revenue. The average accounts receivable is not available. Thus, receivable turnover cannot be determined. Average Days Sales Uncollected Inventory Turnover Average Days Inventory on Hand N/A N/A Since receivable turnover cannot be calculated, average days sales uncollected cannot be determined. 9.37 times 10.41 times Netflix has a content library of DVDs and streaming content as inventory. DVDs are borrowed and returned by the consumer, and streaming content is duplicated on the consumer s device. The number of times a consumer accesses Netflix s contents during an accounting period has decreased over time, probably due to Netflix s competitors. 38.96 days 35.06 days The average number of days that a consumer views content on Netflix has grown by almost 4 days, as the consumer has many sources of entertainment to choose from.

Financial Analysis Profitability Ratios Year 2010 2009 Comment Profit Margin 7.44% 6.94% Sales dollars contributed to net income increased a small amount from 2009 to 2010. Asset Turnover 2.60 times 2.58 times The efficiency of turning assets into sales has stayed mostly the same. Return on Assets 19.36% 17.89% There was a small increase in use of assets to generate income. Return on Equity 65.75% 42.42% The business earned more by about 20% for each dollar invested by stockholders.

Financial Analysis Solvency Ratio Year 2010 2009 Comment Debt to Equity 238.45% 241.33% The ratio stayed about the same within the two years. The creditors have more say than investors do in the company.

Financial Analysis Market Strength Ratios Year 2010 2009 Comment Price/Earnings per Share 59.36 times 27.82 times The ratio doubled from 2009 to 2010. Investors expect Netflix, Inc. to continue its success. Dividend Yield 0.00% 0.00% Dividends per share is $0.00, which would make dividend yield equal to 0%.