Netflix, the increasingly popular online digital entertainment streaming service, started

with humble beginnings similar to many other companies. Reed Hastings and Marc Rudolf
started the company in 1997, on the basis of using the internet to rent DVDs by mail. It was set
up as a monthly subscription service allowing for the rental of DVDs with no late fees, simply
mail the DVD back when you were done using it and they would send you the next DVD on
your list. The business model quickly flourished and has grown into no other than what we know
it as today.
While it is hard to believe, in the year 2000, the company of Netflix almost came to an
end. Rick Hastings and Marc Rudolf offered to sell the company to Blockbuster, for an
undisclosed amount, and give them the opportunity to officially turn it into BlockBuster.com.
Obviously this did not happen and Netflix took it as an opportunity to keep pushing forward and
adding to their business model, eventually turning the tables on Blockbuster. At one point, Reed
Hastings decided to drastically decrease prices to fight off a comeback attempt by the very
people they tried to sell the company to. The thought at the time would be that Netflix would go
broke because of this; their stock drastically falling. However, this was not the case and they
ended up pushing Blockbuster out which resulted in the company growing significantly.
Netflix has approximately 32.3 percent of the market share and is aggressively expanding
into other markets. It is currently leads the market ahead of rivals such as Googles Youtube,
Hulu, and Amazon. Netflix is already in forty one countries and just recently expanded in France
and Germany at the end of 2014. They reported a 72 percent increase in international subscribers
at this time last year and that number is still increasing. After suffering some extreme downfalls
in 2011 and 2012, the stock prices falling below $60, Netflix has bounced back and currently has
a stock price north of $540 per share.

This financial statement analysis of Netflix, Inc. encompasses the years ending December
31 of 2011, 2012 and 2013. Financial data was gathered from the 2011, 2012, and 2013 financial
statements as well as the 10-K filings with the SEC. Movie rental companies are included in the
Video tape and disc rental industry as well as the internet retail industry. Netflix currently has
approximately 57 percent of the market share. Numbers in this report will be reported in millions
unless otherwise stated. Total revenue for Netflix has increased each year from 2011 to 2013.
Revenue was $4,374.6 for 2013 versus $3,609.3 for 2012, which was a 17.5 percent increase
(Netflix 10-K, 2013). The increase from 2011 to 2012 was 11.2 percent. The increase in revenues
resulted from an increase in subscribers from year to year. At the beginning of 2012, Netflix had

a total of 26.5 million subscribers. At the end of that same year it had a total of 33.3 million
subscribers. That is an increase of 20.4 percent during the period of only one year. At the end of
the first quarter of 2013 they had 36.3 million subscribers and at the end of the fourth quarter
they had 44.4 million subscribers. That is an increase of 18.2 percent during the year of 2013.
That is almost a 40 percent increase in the amount of subscribers over a two year period. This
alone accounted for the majority of increase in revenue throughout this period of time.

Through out this time frame revenue

per

subscriber has grown slightly, which is

different from years past where the cost of
subscription had actually decreased. In the
past few years, there has been a 1$ price
increase for new subscribers, while current
users were guaranteed the price of $7.99 for
an extended time period.
For Netflix, operating expenses include technology and development expenses,
marketing, and general and administrative expenses. General and administrative expenses consist
of payroll and related expenses for corporate personnel, as well as professional fees and other
general corporate expenses. These expenses also include the gain/loss on disposal of DVDs,
although this is a very small portion. From 2011 to 2012, the general and administrative expenses
(in thousands) decreased from 148,306 to 139,016, which is a 6 percent drop. However, from
2012 to 2013, the general and administrative expenses increased from 139,016 to 180,301, which
was an increase of 30 percent (Netflix 10-K, 2013). These increases were primarily due to the 31
percent increase in the average headcount which was added to support the massive growth the
company was going through.
Technology and development consist of payroll and related costs incurred in making
improvements to Netflixs service offerings. It also includes costs associated with computer
hardware and software. These expenses increased 27 percent from 259,033 in 2011 to 329,008 in
2012. It also increased another 15 percent from 329,008 to 378,769 (Netflix 10-K, 2013). These
substantial increases are primarily due to supporting improvements in their streaming services as

well as continuing to stretch into the international market. From 2012 to 2013, there was a $42.8
million dollar increase in technology and development that was solely tied to personnel related
cost to keep up with the growth of the company.
For 2011, 2012, and 2013, Netflix had an increasing operating profit margin due to the
increase in subscriptions and overall
growth of the company. Netflixs
gross profit margins are head and
shoulders above the industry
averages. In 2013, Gross profit made
up 80.8 percent of sales, whereas the
industry average was 36.2 percent.
From 2012 to 2013 Netflixs
operating profit increased 23.99 percent from 2685.5 to 3,533 to round out an extremely well
year for Netflix. However, this was not always the case for Netflix. Going into 2011, gross,
operating, and net income margins had been sliding for several years. While, during the specific
time period of 2011 through 2013, it can be perceived that Netflix has grown in leaps and
bounds; this perception is slightly inflated. While the company has grown significantly during
the 2011-2013 era, a decision was made in 2011 that caused Netflix to lose millions of
subscribers as well as millions of dollars in revenue. This decision stunted Netflix growth in the
last quarter of 2011 and last until the end of 2012.
In September of 2011, it was announced that not only was Netflix going to raise the
prices by a combined 60 percent, they were going to be splitting the company into two separate
entities. Netflix would remain and be designated for only the online streaming services. The mail

in

DVD service would be moved to a new service

called Qwikster. The Qwikster website
and service would be completely
removed from Netflix, forcing consumers
who wanted access to both services to

have

two completely independent subscriptions.

This action of splitting the company and their services was extremely unpopular with consumers,
ultimately resulting in the loss of 800,000 subscriptions during a three month period. This loss
of subscribers certainly has an affect on Netflixs bottom line but had an even bigger affect on
investors and the the companies stock price.
Cash and cash equivalents represented 39 percent of Netflixs current assets in 2013. This
has been a steady figure since 2007, when the company began using cash for short term
investments. Netflixs DVDs are categorized as assets. The current content library portion of
current assets includes the content purchased for streaming online that will be used in less than a
year. In recent years, the total assets of the company have increased significantly, going from
679.7 in 2009 to 5412.60 in 2013. That is an 87.4 percent increase in a period of 4 years. Current
assets has been a big portion of that increase growing from 411 in 2009 to 3058.80 in 2013.
While plant, property and equipment increased from 240.5 to 2,224.70 during the same period.
The majority of Netflix liabilities are respresented by current liabilities. There were
significant changes to Netflix current liabilities from 2011 to 2013.Current liabilities increased
by 68 percent in 2011, 27 percent in 2012, and 22 percent in 2013.These increases can be
attributed to increases in accounts payable in 2011, and increases in other current liabilities in
2012-2013. Accounts payable comprised 13.38 percent of total liabilities andequity in 2009,

22.71 percent in 2010, and 33.01 percent in 2011. Other current liabilities comprised 34.45
percent of total liabilities and equity in 2012, and 32.81 percent in 2013.
Cash provided by operating activities increased approximately $75 million from 20122013. This was due to an increase in revenues of $765.3 million during this time period. This
increase was somewhat offset by increased payments for content acquisition and licensing other
than DVD library of $502.6 million or 24 percent as well as increased payments associated with
higher operating expenses. Operating activities were further impacted by increased payments for
streaming content delivery, payment processing fees and customer service call centers due to
growing member base.
Cash used in investing activities increased $10.1 million, primarily due to an increase in
the acquisition of DVD content library and a $30.4 million increase in captial expenditures of
property and equipment. Cash outflow was offset by a $23.2 million increase in the proceeds
from sales and maturities of short-term investments, net of purchases.
Cash provided by financing activities increased $470.7 million. In the first quarter of
2013, Netflix issued $500.0 million of 5.375% Notes, with net proceeds of $490.6 million after
payment of debt issuance costs. This was offset by the $219.4 million redemption of 8.50%
Senior Notes. Financing activities were further impacted by $197.6 million of increased cash
flows provided by stock option exercises.
With Netflix revenue and income on the upward movement, the company was showing
strong profitability ratios. Gross margin is the measure of how well a company controls its costs.
Netflix seems to have its cost under control up until 2012, when the company decided to start
investing heavily in its international expansion. However, also during this period Netflix

experienced a decrease in its customer

base due to the incident with
Qwikster at the end of 2011, which
had an negative effect on revenues.
Because of this, during the period of
2012-2013, Netflix cost seems to be
increasing at a higher rate than its
revenue, which explains its very low
operating margin.
Asset turnover ratio measures the efficiency of a company's use of its assets in generating
sales revenue to the company. The higher the ratio the more effective a company is in using their
assets to generate revenue. Overall, total assets increased from 2011 to 2012 by 29 percent and
2012 to 2013 by 36 percent. The increase during this time period is associated with the purchase
of short-term investments and equipment. In 2011, the asset turnover ratio decreased to 1.58,
1.03 in 2012, and .93 in 2013. Netflix total asset turnover shows that for every dollar of assets
the company owned in 2011 to 2013, it generated $1.58, $1.03, and $0.93 in sales. Netflix asset
turnover is decreasing due to the increasing total assets. This is happening regardless of the
increasing revenue during the same time period.
Current Ratio measures a company's ability to pay its short-term obligations. The ratio
gives an idea of the company's ability to pay back its short-term liabilities with its short-term
assets such as cash, inventory, or receivables. The higher the current ratio, the more capable the
company is of paying its obligations, and a ratio under one would suggest that a company would
be unable to pay off its short term obligations if they suddenly came due. From 2011 to 2013,

Netflix has maintained a current ratio of

over 1, which goes to show that the
company is able to meet their short term
obligation if need be. However, if you
take a closer look at the trend, it shows
that the current ratio has been decreasing
from 2011 to 2013. Referring to the
companys balance sheet, current
liabilities increased significantly due to the increase in other current liabilities in 2012 and 2013,
causing the current ratio to decrease.
The cash ratio can be considered the most conservative of the short term liquidity ratios.
It only looks at the most liquid assets of the company, or those that can be most easily used to
pay off current obligations. It ignores inventory and receivables because there is no gurantee that
these two accounts can be converted to cash quick enough to meet current liabilities. Netflix had
a cash flow liquidity ratio of .65 for 2011, .45 for 2012, and .56 for 2013. The decrease from
2011 to 2012 is because of an increase in current liabilities. Cash flow from operations decreased
by 93% between 2011 and 2012 and increased 326% between 2012 and 2013. These ratios shows
that Netflix has enough cash and cash equivalents to pay off its short-term obligations if needed.
Debt to equity ratio measures of the relationship between the companys debt and the
equity of the company. It also shows the extent to which shareholders' equity can fulfill a
company's obligations to creditors in the event of liquidation. If a debt to equity ratio is higher, it
shows that company is borrowing aggresively and that the creditors have a bigger stake in the
company than the shareholders. Netflix debt to equity ratios are decreasing from 2011-2013 from

67.53 percent to 39.79 percent. This can be seen as a good sign, that the shareholders have a
greater stake in the company and could pay off existing debt if need be. However, it could also
be construed that Netflix is not taking advantage of financial leverage.

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