NETFLIX, INC. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; our future financial performance, including expectations regarding revenues, deferred revenue, operating income and margin, net income, expenses, and profitability; liquidity, including the sufficiency of our capital resources, adequacy of existing facilities, net cash provided by (used in) operating activities, access to financing sources, and free cash flows; capital allocation strategies, including any stock repurchases; seasonality; impact of foreign exchange rate fluctuations; the impact of the discontinuance of the LIBO Rate; future regulatory changes and their impact on our business; price changes and testing; impact of recently adopted accounting pronouncements; accounting treatment for changes related to content assets; membership growth, including impact of content and pricing changes on membership growth; partnerships; member viewing patterns; dividends; future contractual obligations, including unknown content obligations and timing of payments; our global content and marketing investments, including investments in original programming; content amortization; tax expense; unrecognized tax benefits; deferred tax assets; our ability to effectively manage change and growth; and the impact of the coronavirus (COVID-19) pandemic and our response to it. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission ("SEC") onJanuary 28, 2021 , in particular the risk factors discussed under the heading "Risk Factors" in Part I, Item IA. We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law. Investors and others should note that we announce material financial information to our investors using our investor relations website (ir.netflix.net),SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media and blogs to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media and blogs could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels and blogs listed on our investor relations website.
Overview
We are one of the world's leading entertainment services with over 209 million paid streaming memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials. Additionally, we continue to offer our DVD-by-mail service inthe United States ("U.S."). We are a pioneer in the delivery of streaming entertainment, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy entertainment directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of streaming entertainment. 19 -------------------------------------------------------------------------------- Table of Contents Our core strategy is to grow our streaming membership business globally within the parameters of our operating margin target. We are continuously improving our members' experience by expanding our content with a focus on a programming mix of content that delights our members and attracts new members. In addition, we are continuously enhancing our user interface and extending our streaming service to more internet-connected screens. Our members can download a selection of titles for offline viewing. Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet-connected screens and when they tend to increase their viewing. Historically, the first and fourth quarters (October through March) represent our greatest streaming membership growth. In addition, our membership growth can be impacted by our content release schedule and changes to pricing. Results of Operations
The following represents our consolidated performance highlights:
As of/ Three Months Ended Change
June 30, June 30,
2021 2020 Q2'21 vs. Q2'20
(in thousands, except revenue per membership and percentages)
Financial Results:
Streaming revenues $ 7,295,485 $ 6,086,715 $ 1,208,770 20 %
DVD revenues 46,292 61,571 (15,279) (25) %
Total revenues $ 7,341,777 $ 6,148,286 $ 1,193,491 19 %
Operating income $ 1,847,630 $ 1,357,928 $ 489,702 36 %
Operating margin 25.2 % 22.1 % 3.1 % 14 %
Global Streaming Memberships:
Paid net membership additions 1,541 10,091 (8,550) (85) %
Paid memberships at end of period 209,180 192,947 16,233 8 %
Average paying memberships 208,410 187,902 20,508 11 %
Average monthly revenue per paying membership $ 11.67 $ 10.80 $ 0.87 8 %
Consolidated revenues for the three months ended June 30, 2021 increased 19% as
compared to the three months ended June 30, 2020 . The increase in our
consolidated revenues was due to the 11% growth in average paying memberships
and an 8% increase in average monthly revenue per paying membership. The
increase in average monthly revenue per paying membership resulted from our
price changes and favorable fluctuations in foreign exchange rates. Paid net
membership additions for the three months ended June 30, 2021 decreased 85% as
compared to the three months ended June 30, 2020 . We believe the decrease in
paid net membership additions can primarily be attributed to the COVID-19
pandemic which contributed to significant paid net membership additions in the
second quarter of 2020, and resulted in less growth in the second quarter of
2021 as compared to the prior year.
The increase in operating margin is primarily due to content amortization
growing at a slower rate as compared to the 19% increase in revenues as a result
of delays in content releases due to the COVID-19 pandemic.
The full extent of the impact of the COVID-19 pandemic on our business,
operations and financial results will depend on numerous evolving factors that
we may not be able to accurately predict. See Part I, Item 1A: "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2020 for
additional details. We have implemented a phased-in return to our offices where
COVID-related restrictions have eased though most of our workforce has had and
continues in most instances to spend a significant amount of time working from
home. While most of our productions have resumed, certain of our productions
continue to experience disruption, as do the productions of our third-party
content suppliers. Our other partners have similarly had their operations
disrupted, including those partners that we use for our operations as well as
development, production, and post-production of content. As a result, the
pandemic has and continues to affect our ability to produce content, which in
turn led to delays in certain content releases. The pandemic varies by
geography, and government measures to contain COVID-19 or slow its spread,
including orders to close all businesses not deemed "essential," isolate
residents to their homes or places of residence, and practice social distancing,
continue to remain in effect or may be rescinded, modified, or reinstated. We
anticipate that these actions and the global health crisis caused by COVID-19,
including any resurgences, will continue to negatively impact business activity
across the globe. We will continue to actively monitor the situation and may
take further actions that alter our business operations as may be required by
federal, state, local or foreign authorities, or that we determine are in the
best interests of our employees, customers, partners and stockholders. It is
not clear what the potential effects any such alterations or modifications may
have on our business, including the effects on our customers, suppliers or
vendors, or on our financial results.
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Streaming Revenues We derive revenues from monthly membership fees for services related to streaming content to our members. We offer a variety of streaming membership plans, the price of which varies by country and the features of the plan. As ofJune 30, 2021 , pricing on our plans ranged from theU.S. dollar equivalent of$3 to$24 per month. We expect that from time to time the prices of our membership plans in each country may change and we may test other plan and price variations. The following tables summarize streaming revenue and other streaming membership information by region for the three and six months endedJune 30, 2021 andJune 30, 2020 .United States andCanada (UCAN) Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 As of/ Three Months Ended Change June 30, 2021 June 30, 2020 Q2'21 vs. Q2'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 3,234,643 $ 2,839,670 $ 394,973 14 % Paid net membership additions (losses) (433) 2,935 (3,368) (115) % Paid memberships at end of period 73,951 72,904 1,047 1 % Average paying memberships 74,168 71,437 2,731 4 %
Average monthly revenue per paying membership
$ 13.25 $ 1.29 10 % Constant currency change (1) 9 % Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 As of/ Six Months Ended Change June 30, 2021 June 30, 2020 YTD'21 vs. YTD'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 6,405,615 $ 5,542,446 $ 863,169 16 %
Paid net membership additions 15 5,242 (5,227) (100) %
Paid memberships at end of period 73,951 72,904 1,047 1 %
Average paying memberships 74,164 70,127 4,037 6 %
Average monthly revenue per paying membership $ 14.40 $ 13.17 $ 1.23 9 %
Constant currency change (1) 9 %
Europe , Middle East , and Africa (EMEA)
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
As of/ Three Months Ended Change
June 30, 2021 June 30, 2020 Q2'21 vs. Q2'20
(inthousands, except revenue per membership and percentages) Revenues
$ 2,400,480 $ 1,892,537 $ 507,943 27 % Paid net membership additions 188 2,749 (2,561) (93) % Paid memberships at end of period 68,696 61,483 7,213 12 % Average paying memberships 68,602 60,109 8,493 14 %
Average monthly revenue per paying membership
$ 10.50 $ 1.16 11 % Constant currency change (1) 2 % 21
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Table of Contents Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 As of/ Six Months Ended Change June 30, 2021 June 30, 2020 YTD'21 vs. YTD'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 4,744,154 $ 3,616,011 $ 1,128,143 31 %
Paid net membership additions 1,998 9,705 (7,707) (79) %
Paid memberships at end of period 68,696 61,483 7,213 12 %
Average paying memberships 68,103 57,683 10,420 18 %
Average monthly revenue per paying membership $ 11.61 $ 10.45 $ 1.16 11 %
Constant currency change (1) 3 %
Latin America (LATAM)
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
As of/ Three Months Ended Change
June 30, 2021 June 30, 2020 Q2'21 vs. Q2'20
(inthousands, except revenue per membership and percentages) Revenues
$ 860,882 $ 785,368 $ 75,514 10 % Paid net membership additions 764 1,750 (986) (56) % Paid memberships at end of period 38,658 36,068 2,590 7 % Average paying memberships 38,276 35,193 3,083 9 % Average monthly revenue per paying membership$ 7.50 $ 7.44 $ 0.06 1 % Constant currency change (1) 2 % Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 As of/ Six Months Ended Change June 30, 2021 June 30, 2020 YTD'21 vs. YTD'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 1,697,529 $ 1,578,821 $ 118,708 8 %
Paid net membership additions 1,121 4,651 (3,530) (76) %
Paid memberships at end of period 38,658 36,068 2,590 7 %
Average paying memberships 37,996 34,031 3,965 12 %
Average monthly revenue per paying membership $ 7.45 $ 7.73 $ (0.28) (4) %
Constant currency change (1) 4 %
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Asia-Pacific (APAC) Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 As of/ Three Months Ended Change June 30, 2021 June 30, 2020 Q2'21 vs. Q2'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 799,480 $ 569,140 $ 230,340 40 % Paid net membership additions 1,022 2,657 (1,635) (62) % Paid memberships at end of period 27,875 22,492 5,383 24 % Average paying memberships 27,364 21,164 6,200 29 % Average monthly revenue per paying membership$ 9.74 $ 8.96 $ 0.78 9 % Constant currency change (1) 1 % Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 As of/ Six Months Ended Change June 30, 2021 June 30, 2020 YTD'21 vs. YTD'20 (in
thousands, except revenue per membership and percentages) Revenues
$ 1,561,894 $ 1,052,800 $ 509,094 48 %
Paid net membership additions 2,383 6,259 (3,876) (62) %
Paid memberships at end of period 27,875 22,492 5,383 24 %
Average paying memberships 26,769 19,599 7,170 37 %
Average monthly revenue per paying membership $ 9.72 $ 8.95 $ 0.77 9 %
Constant currency change (1) 2 %
(1) We believe constant currency information is useful in analyzing the
underlying trends in average monthly revenue per paying membership. In order to
exclude the effect of foreign currency rate fluctuations on average monthly
revenue per paying membership, we estimate current period revenue assuming
foreign exchange rates had remained constant with foreign exchange rates from
each of the corresponding months of the prior-year period. For the three and six
months ended June 30, 2021 , our revenues would have been approximately $277
million and $357 million lower had foreign currency exchange rates remained
constant with those for the three and six months ended June 30, 2020 .
Cost of Revenues
Amortization of content assets makes up the majority of cost of revenues.
Expenses associated with the acquisition, licensing and production of content
(such as payroll and related personnel expenses, costs associated with obtaining
rights to music included in our content, overall deals with talent,
miscellaneous production related costs and participations and residuals),
streaming delivery costs and other operations costs make up the remainder of
cost of revenues. We have built our own global content delivery network ("Open
Connect") to help us efficiently stream a high volume of content to our members
over the internet. Delivery expenses, therefore, include equipment costs related
to Open Connect, payroll and related personnel expenses and all third-party
costs, such as cloud computing costs, associated with delivering content over
the internet. Other operations costs include customer service and payment
processing fees, including those we pay to our integrated payment partners, as
well as other costs incurred in making our content available to members.
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
Three Months Ended Change
June 30, June 30,
2021 2020 Q2'21 vs. Q2'20
(in thousands, except percentages)
Cost of revenues $ 4,018,008 $ 3,643,707 $ 374,301 10 %
As a percentage of revenues 55 % 59 %
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The increase in cost of revenues was primarily due to a$200 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Other costs of revenues increased$174 million primarily due to expenses related to the COVID-19 pandemic and continued growth in our content production activities, coupled with an increase in payment processing fees driven by our growing member base. The decrease in cost of revenues as a percentage of revenues from 59% to 55% is primarily due to delays in content releases due to the COVID-19 pandemic, resulting in content amortization growing at a slower rate as compared to the growth in revenue. Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 Six Months Ended Change June 30, June 30, 2021 2020 YTD'21 vs. YTD'20 (in thousands, except percentages) Cost of revenues$ 7,886,519 $ 7,243,408 $ 643,111 9 % As a percentage of revenues 54 % 61 % The increase in cost of revenues was primarily due to a$435 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Other costs of revenues increased$208 million , primarily due to the continued growth in our content production activities, coupled with an increase in expenses associated with streaming delivery costs and payment processing fees driven by our growing member base. The decrease in cost of revenues as a percentage of revenues from 61% to 54% is primarily due to delays in content releases due to the COVID-19 pandemic, resulting in content amortization growing at a slower rate as compared to the growth in revenue. Marketing Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing partners, including consumer electronics ("CE") manufacturers, multichannel video programming distributors ("MVPDs"), mobile operators and internet service providers ("ISPs"). Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses also include payroll and related expenses for personnel that support marketing activities. Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 Three Months Ended Change June 30, June 30, 2021 2020 Q2'21 vs. Q2'20 (in thousands, except percentages) Marketing$ 603,973 $ 434,370 $ 169,603 39 % As a percentage of revenues 8 % 7 %
The increase in marketing expenses was primarily due to a
Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 Six Months Ended Change June 30, June 30, 2021 2020 YTD'21 vs. YTD'20 (in thousands, except percentages) Marketing$ 1,116,485 $ 938,200 $ 178,285 19 % As a percentage of revenues 8 % 8 %
The increase in marketing expenses was primarily due to a
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Technology and Development
Technology and development expenses consist of payroll and related expenses for
all technology personnel, as well as other costs incurred in making improvements
to our service offerings, including testing, maintaining and modifying our user
interface, our recommendations, merchandising and streaming delivery technology
and infrastructure. Technology and development expenses also include costs
associated with computer hardware and software.
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
Three Months Ended Change
June 30, June 30,
2021 2020 Q2'21 vs. Q2'20
(in thousands, except percentages)
Technology and development
As a percentage of revenues 7 % 7 %
The increase in technology and development expenses was primarily due to a $89
million increase in personnel-related costs, primarily due to growth in average
headcount to support the increase in our production activity and continued
improvements in our streaming service.
Six months ended June 30, 2021 as compared to the six months ended June 30, 2020
Six Months Ended Change
June 30, June 30,
2021 2020 YTD'21 vs. YTD'20
(in thousands, except percentages)
Technology and development $ 1,062,528 $ 888,862 $ 173,666 20 %
As a percentage of revenues 7 % 7 %
The increase in technology and development expenses was primarily due to a
General and Administrative General and administrative expenses consist of payroll and related expenses for corporate personnel. General and administrative expenses also include professional fees and other general corporate expenses. Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 Three Months Ended Change June 30, June 30, 2021 2020 Q2'21 vs. Q2'20 (in thousands, except percentages)
General and administrative
57,609 21 %
As a percentage of revenues 5 % 5 %
The increase in general and administrative expenses was primarily due to a $26
million increase in personnel-related costs, primarily due to growth in average
headcount to support the increase in our production activity and continued
improvements in our streaming service. In addition, third-party expenses,
including costs for contractors and consultants, increased $17 million .
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General and administrative
102,718 19 %
As a percentage of revenues 4 % 4 %
The increase in general and administrative expenses was primarily due to a
$45 million increase in personnel-related costs, primarily due to growth in
average headcount to support the increase in our production activity and
continued improvements in our streaming service. In addition, third-party
expenses, including costs for contractors and consultants, increased
$41 million .
Interest Expense
Interest expense consists primarily of the interest associated with our
outstanding debt obligations, including the amortization of debt issuance costs.
See Note 6 Debt in the accompanying notes to our consolidated financial
statements for further detail on our debt obligations.
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
Three Months Ended Change
June 30, June 30,
2021 2020 Q2'21 vs. Q2'20
(in thousands, except percentages)
Interest expense $ 191,322 $ 189,151 $ 2,171 1 %
As a percentage of revenues 3 % 3 %
Six months ended June 30, 2021 as compared to the six months ended June 30, 2020
Six Months Ended Change
June 30, June 30,
2021 2020 YTD'21 vs. YTD'20
(in thousands, except percentages)
Interest expense $ 385,762 $ 373,234 $ 12,528 3 %
As a percentage of revenues 3 % 3 %
Interest expense primarily consists of interest on our Notes of $187 million and
$377 million for the three and six months ended June 30, 2021 . The increase in
interest expense for the three and six months ended June 30, 2021 as compared to
the three and six months ended June 30, 2020 was due to the higher average
aggregate principal of interest bearing notes outstanding.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of foreign exchange gains
and losses on foreign currency denominated balances and interest earned on cash
and cash equivalents.
Three months ended June 30, 2021 as compared to the three months ended June 30,
2020
Three Months Ended Change
June 30, June 30,
2021 2020 Q2'21 vs. Q2'20
(in thousands, except percentages)
Interest and other income (expense) $ (62,519) $ (133,175) $ 70,656 53 %
As a percentage of revenues (1) % (2) %
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Table of Contents Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 Six Months Ended Change June 30, June 30, 2021 2020 YTD'21 vs. YTD'20 (in thousands, except percentages) Interest and other income (expense)$ 206,567 $ (111,478) $ 318,045 285 % As a percentage of revenues 1 % (1) % Interest and other income (expense) increased in the three and six months endedJune 30, 2021 primarily due to foreign exchange losses of$60 million and foreign exchange gains of$198 million , respectively, compared to losses of$148 million and$139 million , respectively, for the corresponding periods in 2020. In the three months endedJune 30, 2021 , the foreign exchange losses were primarily driven by the non-cash loss of$63 million from the remeasurement of our €5,170 million Senior Notes, partially offset by the remeasurement of cash and content liability positions in currencies other than the functional currencies. In the six months endedJune 30, 2021 , the foreign exchange gains were primarily driven by the non-cash gain of$190 million from the remeasurement of our €5,170 million Senior Notes, coupled with the remeasurement of cash and content liability positions in currencies other than the functional currencies. In the three and six months endedJune 30, 2020 , the foreign exchange losses were driven by the non-cash losses of$119 million and$26 million , respectively, from the remeasurement of our €5,170 million Senior Notes, coupled with the remeasurement of cash and content liability positions in currencies other than the functional currencies. Provision for Income Taxes Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 Three Months Ended Change June 30, June 30, 2021 2020 Q2'21 vs. Q2'20 (in thousands, except percentages) Provision for income taxes$ 240,776 $ 315,406 $ (74,630) (24) % Effective tax rate 15 % 30 % Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 Six Months Ended Change June 30, June 30, 2021 2020 YTD'21 vs. YTD'20 (in thousands, except percentages) Provision for income taxes$ 568,563 $ 402,209 $ 166,354 41 % Effective tax rate 16 % 22 % The effective tax rates for the three and six months endedJune 30, 2021 differed from the Federal statutory rate primarily due to the impact of international provisions of the Tax Cuts and Jobs Act and recognition of excess tax benefits of stock-based compensation. The decrease in our effective tax rates for the three and six months endedJune 30, 2021 , as compared to the same period in 2020 was primarily due to the establishment of a valuation allowance on theCalifornia Research and Development credit in the quarter endedJune 30, 2020 partially offset by markedly reduced excess tax benefits related to stock-based compensation as ofJune 30, 2021 . 27
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Liquidity and Capital Resources
As of Change
June 30, December 31, June 30, 2021 vs. December 31,
2021 2020 2020
(in
thousands, except percentages)
Cash, cash equivalents and restricted cash
(5) %
Short-term and long-term debt 15,626,017 16,308,973 (682,956) (4) %
Cash, cash equivalents and restricted cash decreased $434 million in the six
months ended June 30, 2021 primarily due to the repurchase of stock and
repayment of debt, partly offset by cash provided by operations.
Debt, net of debt issuance costs, decreased $683 million primarily due to the
repayment upon maturity of the $500 million aggregate principal amount of our
5.375% Senior Notes in February 2021 , coupled with the remeasurement of our
euro-denominated notes. The amount of principal and interest on our outstanding
notes due in the next twelve months is $1,437 million . As of June 30, 2021 , no
amounts had been borrowed under the $1 billion Revolving Credit Agreement. See
Note 6 Debt in the accompanying notes to our consolidated financial statements.
We anticipate that our future capital needs from the debt market will be more
limited compared to prior years. Our ability to obtain this or any additional
financing that we may choose to, or need to, obtain will depend on, among other
things, our development efforts, business plans, operating performance and the
condition of the capital markets at the time we seek financing. We may not be
able to obtain such financing on terms acceptable to us or at all. If we raise
additional funds through the issuance of equity or debt securities, those
securities may have rights, preferences or privileges senior to the rights of
our common stock, and our stockholders may experience dilution.
In March 2021 , our Board of Directors authorized the repurchase of up to $5
billion of our common stock, with no expiration date. Stock repurchases may be
effected through open market repurchases in compliance with Rule 10b-18 under
the Exchange Act, including through the use of trading plans intended to qualify
under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions,
accelerated stock repurchase plans, block purchases, or other similar purchase
techniques and in such amounts as management deems appropriate. We are not
obligated to repurchase any specific number of shares, and the timing and actual
number of shares repurchased will depend on a variety of factors, including our
stock price, general economic, business and market conditions, and alternative
investment opportunities. We may discontinue any repurchases of our common stock
at any time without prior notice. As of June 30, 2021 , the Company has
repurchased 1,001,565 shares of common stock for an aggregate amount of
$500 million . As of June 30, 2021 , $4.5 billion remains available for
repurchases.
Our primary uses of cash include the acquisition, licensing and production of
content, streaming delivery, marketing programs and personnel-related costs.
Cash payment terms for non-original content have historically been in line with
the amortization period. Investments in original content, and in particular
content that we produce and own, require more cash upfront relative to licensed
content. For example, production costs are paid as the content is created, well
in advance of when the content is available on the service and amortized. We
expect to continue to significantly increase our investments in global content,
particularly in original content, which will impact our liquidity. We currently
anticipate that cash flows from operations, available funds and access to
financing sources, including our revolving credit facility, will continue to be
sufficient to meet our cash needs for at least the next twelve months.
Free Cash Flow
We define free cash flow as cash provided by (used in) operating activities less
purchases of property and equipment and change in other assets. 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 strategic acquisitions and investments and for certain other
activities like stock repurchases. 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, net cash provided by (used in)
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 major recurring differences are excess
content payments over amortization, non-cash stock-based compensation expense,
non-cash remeasurement gain/loss on our euro-denominated debt, and other working
capital differences. Working capital differences include deferred revenue,
excess property and equipment purchases over depreciation, taxes and semi-annual
interest payments on our outstanding debt. Membership fees due are generally
collected quickly.
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Three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 Three Months Ended Change June 30, June 30, 2021 2020 Q2'21 vs. Q2'20 (in thousands, except percentages) Net cash provided by (used in) operating activities$ (63,761) $ 1,041,076 $ (1,104,837) (106) % Net cash used in investing activities (111,278) (142,001) (30,723) (22) % Net cash provided by (used in) financing activities (480,273) 1,090,965 (1,571,238) (144) % Non-GAAP reconciliation of free cash flow: Net cash provided by (used in) operating activities (63,761) 1,041,076 (1,104,837) (106) % Purchases of property and equipment (110,278) (141,741) (31,463) (22) % Change in other assets (1,000) (260) (740) (285) % Free cash flow$ (175,039) $ 899,075 $ (1,074,114) (119) % Net cash provided by (used in) operating activities decreased$1,105 million to$64 million net cash used in operations for the three months endedJune 30, 2021 . The decrease in cash provided by (used in) operating activities was primarily driven by the increase in investments in content that require more upfront cash payments, partially offset by a$1,193 million or 19% increase in revenues. The payments for content assets increased$1,790 million , from$2,619 million to$4,409 million , or 68%, as compared to the increase in the amortization of content assets of$200 million , from$2,607 million to$2,807 million , or 8%. In addition, we had increased payments associated with higher operating expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion. Net cash used in investing activities decreased$31 million for the three months endedJune 30, 2021 , primarily due to a decrease in purchases of property and equipment. Net cash provided by (used in) financing activities decreased$1,571 million for the three months endedJune 30, 2021 , due to no debt issuances in the three months endedJune 30, 2021 as compared to proceeds from the issuance of debt of$1,002 million , net of$8 million issuance costs in the three months endedJune 30, 2020 , coupled with the repurchases of common stock for an aggregate amount of$500 million in the three months endedJune 30, 2021 . Free cash flow was$1,528 million lower than net income for the three months endedJune 30, 2021 primarily due to$1,602 million of cash payments for content assets over amortization expense and$91 million in other non-favorable working capital differences, partially offset by$102 million of non-cash stock-based compensation expense and$63 million of non-cash remeasurement loss on our euro-denominated debt. Free cash flow was$179 million higher than net income for the three months endedJune 30, 2020 , primarily due to a$220 million non-cash valuation allowance for deferred taxes due to legislation which imposed an annual cap on research and development credits,$119 million of non-cash remeasurement loss on our euro-denominated debt and$104 million non-cash stock-based compensation expense, partially offset by$252 million in other non-favorable working capital differences and$12 million of cash payments for content assets over amortization expense. 29
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Six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 Six Months Ended Change June 30, June 30, 2021 2020 YTD'21 vs. YTD'20 (in
thousands, except percentages)
Net cash provided by operating activities
(45) %
Net cash used in investing activities (196,894) (240,304) (43,410) (18) %
Net cash provided by (used in) financing
activities (932,202) 1,134,659 (2,066,861) (182) %
Non-GAAP reconciliation of free cash flow:
Net cash provided by operating activities 713,505 1,300,988 (587,483) (45) %
Purchases of property and equipment (191,279) (239,756) (48,477) (20) %
Change in other assets (5,615) (548) (5,067) (925) %
Free cash flow $ 516,611 $ 1,060,684 $ (544,073) (51) %
Net cash provided by operating activities decreased $587 million to $714 million
for the six months ended June 30, 2021 . The decrease in cash provided by
operating activities was primarily driven by an increase in investments in
content that require more upfront cash payments, partially offset by a $2,589
million or 22% increase in revenues. The payments for content assets increased
$2,305 million , from $5,655 million to $7,960 million , or 41% as compared to the
increase in the amortization of content assets of $435 million , from $5,091
million to $5,526 million , or 9%. In addition, we had increased payments
associated with higher operating expenses, primarily related to increased
headcount to support our continued improvements in our streaming service and our
international expansion.
Net cash used in investing activities decreased $43 million for the six months
ended June 30, 2021 , primarily due to the decrease in purchases of property and
equipment.
Net cash provided by (used in) financing activities decreased $2,067 million in
the six months ended June 30, 2021 , due to no debt issuances in the six months
ended June 30, 2021 as compared to proceeds from the issuance of debt of
$1,002 million , net of $8 million issuance costs in the six months ended June
30, 2020 , coupled with the repayment upon maturity of the $500 million aggregate
principal amount of our 5.375% Senior Notes in February 2021 and repurchases of
common stock for an aggregate amount of $500 million in the six months ended
June 30, 2021 .
Free cash flow was $2,543 million lower than net income for the six months ended
June 30, 2021 primarily due to $2,434 million of cash payments for content
assets over amortization expense, $190 million of non-cash remeasurement gain on
our euro-denominated debt, and $128 million in other non-favorable working
capital differences, partially offset by $209 million of non-cash stock-based
compensation expenses.
Free cash flow was $369 million lower than net income for the six months ended
June 30, 2020 , primarily due to $564 million of cash payments for content assets
over amortization expense and $252 million in other non-favorable working
capital differences, partially offset by a $220 million non-cash valuation
allowance for deferred taxes due to legislation which imposed an annual cap on
research and development credits, $201 million of non-cash stock-based
compensation expenses and $26 million of non-cash remeasurement loss on our
euro-denominated debt.
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Contractual Obligations
For the purpose of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of the payment of the obligations discussed below is estimated based on information available to us as ofJune 30, 2021 . Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. The following table summarizes our contractual obligations as ofJune 30, 2021 : Payments due by Period Contractual obligations (in Less than More than thousands): Total 1 year 1-3 years 3-5 years 5 years Content obligations (1)$ 21,863,144 $
9,885,589
20,723,146 1,436,861 1,809,556 3,130,845 14,345,884
Operating lease obligations (3) 2,794,110 369,505 658,545 581,754 1,184,306
Other purchase obligations (4) 1,375,134 1,026,448 347,768 918 -
Total $ 46,755,534 $ 12,718,403 $ 11,364,332 $ 6,402,133 $ 16,270,666
(1)As of June 30, 2021 , content obligations were comprised of $4.2 billion
included in "Current content liabilities" and $2.3 billion of "Non-current
content liabilities" on the Consolidated Balance Sheets and $15.4 billion of
obligations that are not reflected on the Consolidated Balance Sheets as they
did not then meet the criteria for recognition.
Content obligations include amounts related to the acquisition, licensing and
production of content. An obligation for the production of content includes
non-cancelable commitments under creative talent and employment agreements and
other production related commitments. An obligation for the acquisition and
licensing of content is incurred at the time we enter into an agreement to
obtain future titles. Once a title becomes available, a content liability is
recorded on the Consolidated Balance Sheets. Certain agreements include the
obligation to license rights for unknown future titles, the ultimate quantity
and/or fees for which are not yet determinable as of the reporting date.
Traditional film output deals, or certain TV series license agreements where the
number of seasons to be aired is unknown, are examples of these types of
agreements. The contractual obligations table above does not include any
estimated obligation for the unknown future titles, payment for which could
range from less than one year to more than five years. However, these unknown
obligations are expected to be significant and we believe could include
approximately $1 billion to $4 billion over the next three years, with the
payments for the vast majority of such amounts expected to occur after the next
twelve months. The foregoing range is based on considerable management judgments
and the actual amounts may differ. Once we know the title that we will receive
and the license fees, we include the amount in the contractual obligations table
above.
(2)Debt obligations include our Notes consisting of principal and interest payments. See Note 6 Debt to the consolidated financial statements for further details.
(3)Operating lease obligations are comprised of operating lease liabilities
included in "Accrued expenses and other liabilities" and "Other non-current
liabilities" on the Consolidated Balance Sheets, inclusive of imputed interest.
Operating lease obligations also include additional obligations that are not
reflected on the Consolidated Balance Sheets as they did not meet the criteria
for recognition. See Note 5 Balance Sheet Components in the accompanying notes
to our consolidated financial statements for further details regarding leases.
(4)Other purchase obligations include all other non-cancelable contractual
obligations. These contracts are primarily related to streaming delivery and
cloud computing costs, as well as other miscellaneous open purchase orders for
which we have not received the related services or goods.
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As of June 30, 2021 , we had gross unrecognized tax benefits of $177 million . At
this time, an estimate of the range of reasonably possible adjustments to the
balance of unrecognized tax benefits cannot be made.
Off-Balance Sheet Arrangements
We do not have transactions with unconsolidated entities, such as entities often
referred to as structured finance or special purpose entities, whereby we have
financial guarantees, subordinated retained interests, derivative instruments,
or other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligation under a variable interest in an
unconsolidated entity that provides financing, liquidity, market risk, or credit
risk support to us.
IndemnificationThe information set forth under Note 7 Commitments and Contingencies to the consolidated financial statements under the caption "Indemnification" is incorporated herein by reference.
Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods. TheSEC 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 make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Content
We acquire, license and produce content, including original programming, in
order to offer our members unlimited viewing of video entertainment. The content
licenses are for a fixed fee and specific windows of availability. Payment terms
for certain content licenses and the production of content require more upfront
cash payments relative to the amortization expense. Payments for content,
including additions to content assets and the changes in related liabilities,
are classified within "Net cash provided by (used in) operating activities" on
the Consolidated Statements of Cash Flows.
We recognize content assets (licensed and produced) as "Content assets, net" on
the Consolidated Balance Sheets. For licensed content, we capitalize the fee per
title and record a corresponding liability at the gross amount of the liability
when the license period begins, the cost of the title is known and the title is
accepted and available for streaming. For produced content, we capitalize costs
associated with the production, including development cost, direct costs and
production overhead. Participations and residuals are expensed in line with the
amortization of production costs.
Based on factors including historical and estimated viewing patterns, we
amortize the content assets (licensed and produced) in "Cost of revenues" on the
Consolidated Statements of Operations over the shorter of each title's
contractual window of availability or estimated period of use or ten years,
beginning with the month of first availability. The amortization is on an
accelerated basis, as we typically expect more upfront viewing, for instance due
to additional merchandising and marketing efforts, and film amortization is more
accelerated than TV series amortization. On average, over 90% of a licensed or
produced content asset is expected to be amortized within four years after its
month of first availability. We review factors that impact the amortization of
the content assets on a regular basis. Our estimates related to these factors
require considerable management judgment.
Our business model is subscription based as opposed to a model generating
revenues at a specific title level. Content assets (licensed and produced) are
predominantly monetized as a group and therefore are reviewed at a group level
when an event or change in circumstances indicates a change in the expected
usefulness of the content or that the fair value may be less than unamortized
cost. To date, we have not identified any such event or changes in
circumstances. If such changes are identified in the future, these aggregated
content assets will be stated at the lower of unamortized cost or fair value. In
addition, unamortized costs for assets that have been, or are expected to be,
abandoned are written off.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of
our reported results of operations using the asset and liability method.
Deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases as well as net operating loss and tax credit carryforwards. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits for which future realization is uncertain.
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Although we believe our assumptions, judgments and estimates are reasonable,
changes in tax laws or our interpretation of tax laws and the resolution of any
tax audits could significantly impact the amounts provided for income taxes in
our consolidated financial statements.
In evaluating our ability to recover our deferred tax assets, in full or in
part, we consider all available positive and negative evidence, including our
past operating results, and our forecast of future earnings, future taxable
income and prudent and feasible tax planning strategies. The assumptions
utilized in determining future taxable income require significant judgment and
are consistent with the plans and estimates we are using to manage the
underlying businesses. Actual operating results in future years could differ
from our current assumptions, judgments and estimates. However, we believe that
it is more likely than not that most of the deferred tax assets recorded on our
Consolidated Balance Sheets will ultimately be realized. We record a valuation
allowance to reduce our deferred tax assets to the net amount that we believe is
more likely than not to be realized. As of June 30, 2021 , the valuation
allowance of $326 million was related to the California R&D credits and certain
foreign tax attributes that we do not expect to realize.
We did not recognize certain tax benefits from uncertain tax positions within
the provision for income taxes. We may recognize a tax benefit only if it is
more likely than not the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon settlement. At June 30, 2021 , our estimated gross
unrecognized tax benefits were $177 million of which $109 million , if
recognized, would favorably impact our future earnings. Due to uncertainties in
any tax audit outcome, our estimates of the ultimate settlement of our
unrecognized tax positions may change and the actual tax benefits may differ
significantly from the estimates. See Note 9 Income Taxes to the consolidated
financial statements for further information regarding income taxes.
Recent Accounting Pronouncements
The information set forth under Note 1 to the consolidated financial statements
under the caption "Basis of Presentation and Summary of Significant Accounting
Policies" is incorporated herein by reference.
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