Reference no: EM133094302
Question: Netflix Inc. 12 Months Ended
Consolidated Income Statement (in thousands) Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018
Revenues $ 24,996,056 $ 20,156,447 $ 15,794,341
Cost of revenues 15,276,319 12,440,213 9,967,538
Gross Margin 9,719,737 7,716,234 5,826,803
Expenses:
Marketing expense 2,228,362 2,652,462 2,369,469
Technology and development expense 1,829,600 1,545,149 1,221,814
General and administrative expense 1,076,486 914,369 630,294
Total Expenses 5,134,448 5,111,980 4,221,577
Operating income 4,585,289 2,604,254 1,605,226
Interest expense 767,499 626,023 420,493
Other income (expense) (618,441) 84,000 41,725
Income before income tax expense 3,199,349 2,062,231 1,226,458
Income tax expense (437,954) (195,315) (15,216)
Net income $ 2,761,395 $ 1,866,916 $ 1,211,242
Earnings per share $ 6.26 $ 4.26 $ 2.78
Dividend per share $ 0.00 $ 0.00 $ 0.00
Closing Market Price $ 540.73 $ 323.57 $ 267.66
Netflix Inc. As of
Consolidated Balance Sheet (in thousands) Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018
Current assets:
Cash and cash equivalents $ 8,205,550 $ 5,018,437 $ 3,794,483
Current content assets, net - - 5,151,186
Other current assets 1,556,030 1,160,067 748,466
Total current assets 9,761,580 6,178,504 9,694,135
Non-current assets:
Content assets, net 25,383,950 24,504,567 14,960,954
Property and equipment, net 960,183 565,221 418,281
Other non-current assets 3,174,646 2,727,420 901,030
Total non-current assets 29,518,779 27,797,208 16,280,265
Total assets 39,280,359 33,975,712 25,974,400
Current liabilities:
Current content liabilities 4,429,536 4,413,561 4,686,019
Accounts payable 656,183 674,347 562,985
Accrued expenses 1,102,196 843,043 477,417
Deferred revenue 1,117,992 924,745 760,899
Short-term debt 499,878 -
Total current liabilities 7,805,785 6,855,696 6,487,320
Non-current liabilities:
Non-current content liabilities 2,618,084 3,334,323 3,759,026
Long-term debt 15,809,095 14,759,260 10,360,058
Other non-current liabilities 1,982,155 1,444,276 129,231
Total non-current liabilities 20,409,334 19,537,859 14,248,315
Total liabilities 28,215,119 26,393,555 20,735,635
Owner''s Equity:
Preferred stock - - -
Common stock 3,447,698 2,793,929 2,315,988
Accumulated other comprehensive loss 44,398 (23,521) (19,582)
Retained earnings 7,573,144 4,811,749 2,942,359
Total owner''s equity 11,065,240 7,582,157 5,238,765
Total liabilities and stockholders'' equity $ 39,280,359 $ 33,975,712 $ 25,974,400
Netflix Inc. 12 Months Ended
Consolidated Statements Of Cash Flows (in millions) Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018
Cash flows from operating activities:
Net income 2,761,395 1,866,916 1,211,242
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Additions to content assets (11,779,284) (13,916,683) (13,043,437)
Change in content liabilities (757,433) (694,011) 999,880
Amortization of content assets 10,806,912 9,216,247 7,532,088
Depreciation and amortization of property, equipment and intangibles 115,710 103,579 83,157
Stock-based compensation expense 415,180 405,376 320,657
Foreign currency remeasurement loss (gain) on debt 533,278 (45,576) (73,953)
Other non-cash items 293,126 228,230 81,640
Deferred income taxes 70,066 (94,443) (85,520)
Changes in operating assets and liabilities:
Other current assets (187,623) (252,113) (200,192)
Accounts payable (41,605) 96,063 199,198
Accrued expenses and other liabilities 198,183 157,778 150,422
Deferred revenue 193,247 163,846 142,277
Other non-current assets and liabilities (194,075) (122,531) 2,062
Net cash provided by (used in) operating activities 2,427,077 (2,887,322) (2,680,479)
Cash flows from investing activities:
Purchases of property and equipment (497,923) (253,035) (173,946)
Change in other assets (7,431) (134,029) (165,174)
Net cash used in investing activities (505,354) (387,064) (339,120)
Cash flows from financing activities:
Proceeds from issuance of debt 1,009,464 4,469,306 3,961,852
Debt issuance costs (7,559) (36,134) (35,871)
Proceeds from issuance of common stock 235,406 72,490 124,502
Other financing activities - - (1,956)
Net cash provided by financing activities 1,237,311 4,505,662 4,048,527
Effect of exchange rate changes on cash, cash equivalents and restricted cash 36,050 469 (39,682)
Net increase in cash, cash equivalents and restricted cash 3,195,084 1,231,745 989,246
Cash, cash equivalents and restricted cash, beginning of year 5,043,786 3,812,041 2,822,795
Cash, cash equivalents and restricted cash, end of year 8,238,870 5,043,786 3,812,041
3.1.A Managing liquidity is a challenge faced by individuals and organizations alike. In the case of a shutdown by the Federal government, most federal employees who do not receive their regular paychecks would become acutely aware of the potential for a liquidity crisis in their households. The business strategyembraced by Netflixis a high-risk strategy that also underscores the importance of managing liquidity. You can think of the current ratio as a "financial vital sign" corresponding to pulse or blood pressure in the domain of "medical vital signs."
Compute the current ratio for Netflix as of December 31,2020, December 31,2019, December 31, 2018. Do NOT include "Deferred revenue" in the computation of this ratio. Round to 2 decimalplaces.
Answers: December 31, 2020 ; December 31, 2019 ; December31, 2018
3.1.B During the three years covering fiscal years 2018, 2019, and 2020, Netflix's current ratio dipped to a level that signaled an impending liquidity crisis. If Netflix had not responded to the impending crisis and had maintained the same cash balance on December 31, 2020, that they reported on December 31, 2019, what would have been the value of its current ratio on December 31, 2020? Do NOT include "Deferred revenue" in thecomputation of thisratio. Round to 2 decimal places.
Operating/Profitability Metrics
3.2.A. During the three years covering fiscal years 2018, 2019,and 2020, the amounts Netflix reportedas "revenue" increased substantially. Netflix depends heavily on marketing to drive demand. Compute the percentage of sales revenue spent on marketing expenses for the fiscal years ended December 31, 2018, and December 31, 2020. What is the change in the percentage of sales revenue spent on marketing expense from the year ended December 31, 2018, to the year ended December 31, 2020, andhas the percentage increased or (decreased)? Round percentages to 1 decimal places (e.g., xx.x%)
3.2.B Marketing appears to be a crucial part of Netflixs operating strategy and cost structure. Computethe percentage of "Operating expenses"dedicated to marketing for the fiscal years ending December 31, 2020, 2019, and 2018. The term "Operating expenses" includes all expenses considered in the calculation of "Operating income"except "Cost of revenues." Round percentages to 1 decimal place (e.g., xx.x%).
3.2.C If Netflix did not consider marketing essential, we can assume they would cut backon marketing and devote those funds to other purposes. Without a major commitment to marketing, it appears that Netflix cannot achieve its goal of protecting and increasing market share. Explain how the relationship between marketing expense and total operating expenses creates a cost structure that results in a barrier to entry that discourages or prevents existingand potential competitors from attempting to compete with Netflix for market share.
3.2.D The "inventory" that Netflix streams includes previously canceled series from other networks, licensed and co-produced content, and Netflix original content. Netflix uses the term "content," whichroughly corresponds to "inventory," and the term "cost of revenue," which roughly corresponds to "cost of goods sold." Content assets are intangible propertyrights. Our coursehas considered the importance of managing costs and cost accounting. These topics areof crucial significance to Netflix now that they have decided to produce their own original content.
The ratio of cost-of-revenue/revenue provides a metric to assess how well Netflix has managed its gross profit percentage. An increase in rates charged to customers and/ora decrease in the cost of revenue will result in an increase in the gross profit ratio. Relatively small changes in these ratios can have a substantial impact on financial performance. The change in the ratio of cost-of- revenue/revenue over the three-year periodis indicative of proactive measures undertaken by Netflix. If the ratio of cost-of-revenue/revenue reported for the year ended December 31, 2018, had remained constant over the three-year period, how much in thousands of dollars would operating income for the year ended December 31, 2020 have decreased? Note:To avoid roundingerrors, use a spreadsheetfor all calculations.
3.2.E With reference to the preceding calculation (part 3.2.D),is the dollar amount of the improvement in net income that is attributable to an improvement in the ratio of cost-of- revenue/revenue material? In other words, is the amount of the impact of the improvement significant in comparison to the net income reported for the year ended December31, 2020? Explain.
3.2.F Netflix makes content for streaming rather than making a tangible product,such as furniture or widgets. When accounting for the cost of original content, Netflix will account for the direct materials, direct labor, and overhead expended to create the content. Producing content requires production assets, licenses, and an investment in technology. Explain how accounting choices regarding methods of depreciation and amortizations can influence the determination of the amounts reported as "cost-of-revenue."
Capitalization Metrics
3.3. A Many individuals have chosen to purchase their homes ratherthan rent, and manyof these owners depend upon mortgages as a source of long-term financing. During the housing crisis beginning in 2008, home owners who bought with minimal down payments and home owners who borrowed extensively against their home's appreciation found themselves in a highly leveraged position when the housing crisis struck. These decisions made by homeowners parallel decisions made by Netflix executives. As reported on December 31, 2020, December 31, 2019, and December 31, 2018, what percentage of total assets is financed by long-term debt? Round percentages to 1 decimal place.
3.3.B As reported on December 31, 2020, December31, 2019, and December 31, 2018 what percentage of total assets is financed by contributed capitalpaid-in by stockholders? Round percentages to 1 decimal place.
3.3.C As reported on December 31, 2020, what percentage of total assets is financed by past profits that were reinvested in the company? Note: Ignore the amount reportedas "Accumulated other comprehensive loss;" it is relatively small and immaterial. Round percentage to 1 decimalplace.
3.3.D During the three-year period ended December 31, 2020, has Netflix depended upon leveraging debt as an essential part of its growth strategy? Explain.
3.3.E In October of 2018, Netflix announced its intent to sell $2 billion in bonds to institutional buyers through an offering of U.S. dollar and Euro-denominated bonds. The bonds are not secured by fixe dassets or any other collateral, and the proceeds will be used for operating purposes.
At issuance, Moody ''sassigned Netflix a long-term creditrating of Ba3,which is considered speculative, or ''junk.'' Investors purchasing these bonds will receive relatively higher interest payments to compensate them for the underlying risk. Netflix will incur higher debt carrying expenses because of the relatively high rate it must pay. On the otherhand, Netflix stockholders have not received any dividends during the three years ended December 31, 2020.
How do you explain the stockholders'' willingness to accept the Board of Directors'' decision to with hold dividend payments to stockholders?