Netflix's 10-K annual report structure and financial disclosures

Netflix Annual Report

The annual report filed as a form 10-K offers investors a detailed look at a company's operating and financial results and, as a result, is an invaluable tool for anyone interested in a company's financial picture. As a publicly-traded company, Netflix is required to submit a form 10-K to the U.S. Securities and Exchange Commission (SEC) and send it to shareholders. The SEC requires the report to conform to a specific format, ensuring that every public company reports the same information. There are several main sections of this report.

The first item in this section describes the business the company engages in, including main products and services it offers and the markets in which it operates. This section also covers several other areas pertaining to the business, such as risk factors that affect the company or its securities. The SEC staff may have previously filed reports about the company's statements that have yet to be resolved and these would also be listed in this section. Any physical properties that the company owns and any pending litigation involving the company are also listed in the first part of the annual report ("How to Read a 10-K," 2011).

Part two of the report focuses more on the financial aspects of the business. The first item lists all the equity securities a company has, including market information, number of holders of outstanding shares, dividends, stock repurchases, and other similar data. The next item provides selected financial information for the last five years, while the company's perspective on the previous fiscal year is related in the next section. The company may explain the risks that currently confront them in the marketplace, contractual obligations, or estimates that are not available elsewhere in the report. The next section requires the disclosure of all exposure to market risk the company faces, including interest rate risk, foreign currency exchange risk, or equity price risk and the company's plan to manage its exposure. The company's audited financial statements are presented in the next section, including income statement, balance sheets, statement of cash flows, and statement of shareholders' equity. These are accompanied by notes explaining the information. The next three items cover disclosure over whether a company has changed accountants and what differences may have arisen to warrant a change, information over a company's disclosure controls and procedures, and any information reported on a different form during the fourth quarter of the year covered by the 10-K ("How to Read a 10-K," 2011).

Part three of the report deals primarily with the management structure of the company. The first section provides information regarding the company's directors and executive officers as well as the company code of ethics. The compensation of the top executives is detailed in the next section and the total number of shares held by top executives and certain large investors are provided in the following section. The relationship between the company and its executives and their families is detailed in the next section, while the final section of part three requires companies to disclose their accounting fees and services for the year ("How to Read a 10-K," 2011).

Part four of the report is a list of financial statements and exhibits included as part of the 10-K. These may include company bylaws, copies of material contracts, and a list of the company's subsidiaries ("How to Read a 10-K," 2011).

Key Factors Affecting Netflix's Performance

Netflix saw revenue increase significantly, from $2.16 billion in 2010 to $3.2 billion in 2011. This was in part accomplished by managing to add over six million unique new subscribers to their service. Since 2007, Netflix has offered clients a streaming service that allows subscribers to watch movies instantly on any Internet-connected device. This service was offered as part of a hybrid package allowing users to receive both streamed content and physical DVDs. In July 2011, Netflix announced a change in their plans' structures, separating the streaming and mail services and forcing customers who wanted both to have two separate subscription plans. The announcement of these new plans was met with widespread customer dissatisfaction and resulted in many subscription cancellations. While there was a net loss of subscribers in the third quarter, the continued popularity of the domestic streaming subscriptions returned domestic subscribers to net growth in the fourth quarter. The company maintains that the year-over-year increase in ending unique domestic subscribers was the primary driver in the 48.2% increase in consolidated revenue for the year ending December 31, 2011 ("Netflix, Inc.," 2011, p.25).

Netflix has also sought to expand its offerings in the international market, with a streaming service now offered in Canada as well as Latin America and the Caribbean. In 2012 these offerings were expanded to the UK and Ireland resulting in overall significant contribution losses, which the company believes will continue for the foreseeable future. Until that segment of the market becomes profitable, Netflix is refraining from launching any new international ventures ("Netflix, Inc.," 2011, p.23). There was also a $56.1 million increase in marketing expenses for the year ("Netflix, Inc.," 2011, p.30).

Management's Internal Control Environment

The Netflix management team states that they are responsible for the internal control of the company and the effectiveness of disclosure controls and procedures. In their assessment of their effectiveness, the management concluded that they had maintained sufficient internal control over financial reporting for the period covered by this annual report. An independent registered public accounting firm confirmed this in their own independent audit of the company. Netflix does concede, however, that no matter how well they may have implemented their internal controls, they cannot prevent all error and fraud. They believe that the effectiveness of their internal control system is inherently limited by its cost and that they can only provide reasonable, rather than absolute, assurances that the objectives of their control system are being met. Because of these limitations, they conclude that no system can provide absolute assurance that all control issues and instances of fraud have been detected ("Netflix, Inc.," 2011, p.41).