Netflix Financial Performance and Health Analysis 2015–2017

Organizational Context

Netflix is a United States-based entertainment company that specializes in on-demand online streaming video, in addition to a DVD-by-mail service within America. The organization was founded in Scotts Valley in 1997 and two years later introduced its prevailing consumer subscription model. Today, Netflix's consumer base comprises more than 117 million subscribers across 190 countries worldwide. Netflix is a forerunner in the internet delivery of television shows and movies, having unveiled its streaming service in the 2007 financial year. From that point onwards, the company developed an ecosystem for internet-connected screens and brought in progressively larger amounts of content, enabling consumers to enjoy television shows and movies directly on their internet-connected devices. Owing to these significant endeavors, Netflix has experienced increasing consumer acceptance of, and investment in, the delivery of television shows and movies directly over the internet (Netflix, 2018).

The business operations of Netflix are categorized into three segments: Domestic Streaming, International Streaming, and Domestic DVD. The Domestic Streaming segment generates revenues from monthly membership fees for services comprising streaming content to members within the United States. The International Streaming segment generates revenues from monthly membership fees for services comprising streaming content to members residing outside the United States. The Domestic DVD segment generates revenues from monthly membership fees for services comprising DVD-by-mail only (Netflix, 2018).

In the 2011 financial year, Netflix transformed its business model by increasing its original content and making major investments in its own original series. Renowned television series that have achieved notable success include House of Cards and Orange Is the New Black. Furthermore, in 2017, the corporation began an aggressive venture into the production of feature films, with the primary objective of releasing numerous films. Unlike conventional broadcasters, Netflix's main objective is not to attract as broad an audience as possible but instead to cater to niches and effectively offer every segment of the population a television show or film they cannot live without.

The key strategy Netflix employs to deliver these product offerings is by growing its streaming membership business internationally within the parameters of its profit margin targets. The company continually enhances the experience of its members through the expansion of streaming content, with an emphasis on a programming mix that engages and excites subscribers. Netflix also continuously improves its user interface and extends its streaming services to an ever-increasing number of internet-connected screens, making it possible for subscribers to download a variety of titles for offline viewing. Most importantly, Netflix continues to grow and develop its streaming services both locally and globally (Netflix, 2018).

Consolidated Income Statement Analysis

The income statement is a financial statement that shows the revenues generated, the expenses incurred, and the resulting profit or loss of an entity for a particular time period. These financial statements are prepared for managers within the entity to report the financial status of business operations during the financial year. The income statement reveals how profitable an entity is and whether financial growth and profitability are expected in the future. It shows external stakeholders whether investments in the entity will generate positive earnings and whether the entity has the ability to service its loans (Weygandt, Kimmel, & Kieso, 2009).

An assessment of Netflix's income statement for the past three years indicates that the company's financial performance gradually improved over this period. Total revenues generated by the company improved considerably: Netflix's total revenue increased from $2.19 billion in 2015 to $2.8 billion in 2016, and further to $4.03 billion in 2017.

In line with the rise in revenues, there was a progressive increase in the cost of revenue. The cost of revenue increased from $4.6 billion in 2015 to $6.02 billion in 2016 and further to $7.66 billion in 2017. Despite this, revenues remained significantly high, and Netflix generated gross profit increasing from $2.19 billion in 2015 to $4.03 billion in 2017, representing a 44.03 percent increase in the most recent financial year. The indirect costs of Netflix comprise items such as general and administrative costs, marketing costs, and technology and development costs — expenses spread across the corporation's revenue base. In the past three years, indirect costs have increased steadily, with the largest component being selling and administrative expenses. Subtracting indirect costs from gross margin yields operating income, which increased significantly from $305.8 million in 2015 to $379.8 million in 2016 and further to $838.7 million in 2017.

Net income represents the profit generated by a corporation after all costs have been paid. Netflix's net income gradually increased from $122.64 million in 2015 to $186.68 million in 2016 and further to $558.93 million in 2017. Shareholders consider this figure because it indicates the returns they may receive from the company in the form of dividends. Investors also examine net income because it signals the direction the company is heading. The gradual increase in net income serves as a key indicator of Netflix's profitability and positive financial performance over the three-year period.

Cash Flow Statement Analysis

The statement of cash flows is a financial statement that depicts how an entity's operating, investing, and financing activities have influenced cash during a given period. In this statement, cash is deemed to include both cash and cash equivalents. It provides users with data regarding an entity's cash inflows and outflows, as well as its investing, operating, and financing activities. In financial management, the statement plays a key role in assessing liquidity levels, establishing the prevailing dividend policy, and scheduling investment and financing activities (Weygandt et al., 2009).

One of the most notable items on the cash flow statement is cash flow from operating activities, which highlights the cash inflows and outflows from a corporation's core business activities of buying, selling, and providing services. The cash flow from operating activities for Netflix declined over the past three years, moving from -$749.4 million in 2015 to -$1.47 billion in 2016 and further to -$1.79 billion in 2017.

Another significant item is cash flow from investing activities, which reports the aggregate change in a corporation's cash position resulting from investment gains or losses and amounts spent on capital asset investments such as plant and equipment. Netflix's cash flow from investing activities shifted from -$179.2 million to $49.77 million and then slightly declined to $34.33 million over the three-year period.

The total cash flows from financing activities — a category that accounts for external activities enabling a company to raise capital, including loan repayments, loan changes, and the issuance of additional stock — increased substantially for Netflix over this period. This figure declined from $1.64 billion in 2015 to $1.09 billion in 2016 but then increased markedly to $3.08 billion in 2017. This increase is associated with a rise in net borrowings, which grew approximately threefold from $1 billion in 2016 to $3.02 billion in 2017.

Netflix has demonstrated remarkable financial performance not only in the most recent year but consistently across all three financial years reviewed. As reflected in the income statement, both revenues and net income increased steadily from 2015 to 2017, indicating positive profitability and strong financial performance relative to market rivals. In addition, the company's stock price quadrupled over the three-year period, signaling investor confidence in the company's growth trajectory.

References

Milling, B. E. (2003). The basics of finance: Financial tools for non-financial managers. iUniverse.

Netflix. (2018). 2018 Annual Report. Retrieved from

Rodriguez, A. (2018). Twenty years ago, Netflix.com launched. The movie business has never been the same. Quartz. Retrieved from

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: Tools for business decision making. John Wiley & Sons.