Intro
This report focuses on analyzing Netflix’s current situation and attempts to understand its strategy from financial analysis. In the first half part, I looked in to income statement, balance sheet, and cash flow statement, to get a complete picture of how Netflix performs. In the second half, I included brief intro of Macy’s financial report as a comparison, highlighting Netflix’s vitality, ambition and future prospects.
Income statement analysis
From income statement, we can see the revenue of Netflix is growing at an incredible rate. The percentage change in revenue from 2015 to 2017 was 23.16%, 30.26% and 32.41%, respectively. Their 2017 annual report further elaborate that revenue’s growth sources are mostly solid from the growth of subscriptions, and the growth of international subscriptions is the main force. Their 2017 annual financial report said:
Consolidated revenues for the year ended December 31, 2017 increased 32%, including an increase of 21% in the Domestic streaming and 58% in International streaming segments. The increase in consolidated revenues was primarily driven by the growth in our international memberships.
International revenues as of the end of December 31, 2017 accounted for 44% of consolidated revenue for the year ended December 31, 2017 as compared to 36% of consolidated revenues for the year ended December 31, 2016.
However, in order to maintain the growth of the number of international subscriptions, it can be seen from the income statement that Netflix’s cost of revenues has also increased a lot. In this regard, more details will be mentioned later in the chapter on Balance Sheet Analysis.
Netflix’s 2017 annual financial report mentions:
The increase in international cost of revenues was primarily due to a $990.3 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming.
(Year ended December 31, 2017 as compared to the year ended December 31, 2016）
The increase in international cost of revenues seems to be a burden for Netflix, but they also mentioned this in the 2017 annual financial report:
International contribution profit increased $535.1 million year over year as profit growth in our more mature markets offset investments in newer markets.
After taking a closer look at the Domestic Streaming Segment and the International Streaming Segment, it reveals that the domestic market is really stable and making a lot of money. The contribution margin of Domestic Streaming Segment has been stable for more than 30% three years in a roll. Although the contribution margin is still very low in the International Streaming Segment, it is a staggering growth from the -10% of last year to 4% of this year, which shows great potential in the future.
In addition, this Netflix expansion timeline indicates that Netflix has already reached most of the countries in the world now, the number of subscriptions in the following years is vital. It is excited to wait and see, whether the effort they put in original contents can attract enough long-term subscribers, and whether the contribution margin of the international market will grow as good as the domestic market.
Balance Sheet Analysis
From the Balance sheet, we can clearly see Netflix’s strategy. They invested a lot of money to construct the original content in an attempt to attract viewers to subscribe and make the revenue grow. To further elaborate, Netflix’s Total Assets has grown very fast in the past three years, with an average growth rate of 40% in three years. Netflix’s liabilities grew even more, with an average growth of 44% in three years.
In-depth, under the catalog of Assets, Property and Equipment, Net and Content Assets increased most, while Current Content Liabilities from the Liabilities section also increased. From here, we can see their determination and confidence in investing in the future.
(in thousands, except share and per share data)
Another thing that can be seen from the Balance sheet is that Netflix’s main source of funding is mostly through long-term debt, which increased by 3,135,121,000 in 2016 to 2017; part of the fundings came from stocks too. Therefore, although Netflix has a good future potential, its investment which is based on debt-raising is still a risk which worth investors to pay close attention.
Cash Flow Statement Analysis
Netflix’s cash is mainly derived from proceeds from issuance of debt in financing activities.
On the other hand, cash flows from operating activities show a negative growth because of the creating original contents. It is usually not good to have negative numbers in operating activities from the cash flow statement, but in the income statement, the operating income from monthly operations is positive. Which means after the amortization of the original content Netflix is profitable, just they have to spend a lot of money in advance, so the cash has been lost.
In the detail of adjustment to net income we can see Netflix spent 9,805,763,000 on Additions to streaming content assets, which proved they use most of their cash on creating original content.
On the whole, Netflix is a company that has invested heavily in the future and is growing wildly now.
Comparison of Netflix and Macy's
After such a analysis and preliminary understanding, I want to compare Netflix with Macy’s to find their similarities and differences.
Retail industry has been bleak in recent years, and Macy’s is no exception. Despite their revenue fell for three consecutive years, there is still a continuous dividend to shareholders, on behalf of the business situation has not been too tight. Looking in to Macy’s 2017 annual financial report, the overall report shows a very stable and slow pace, with no particular highlights.
In completely different industries and under different situations, I find something very interesting when comparing Macy’s cash flow statement to Netflix’s. Macy’s cash flow has always relied on operating activities as the main source of cash income. Because of the debt repayment and payment of shareholder dividends, both investing activities and financing activities are negative in long-terms. Which is totally opposite with Netflix as I previously mentioned, Netflix’s cash source depends on financing activities.
Although Macy’s and Netflix use different way to operate cash flow, they both keep their Current Ratio steady, around 1.4. I think this is amazing. I can feel that there are a lot of calculations behind which helped to shape the company’s future strategy and planning from a financial perspective.
This leads me to take a closer look at both Macy's and Netflix's Ratio.
Macy’s ratio is not bad, it's almost seems they are doing well. But the continued decline of Total Asset Turnover illustrates the growth stagnation and predicament of Macy’s.
Netflix’s performance on the ratio is relatively unsteady and inferior, but showed potential as the whole report always did.
Overall, Macy’s status look smooth, without too many problems, but there is a sullen atmosphere. From the financial report, I can’t read their future direction and I can’t see future plans and strategies. This brings a bit worrying. Netflix’s financial report is just the opposite. It shows their future through numbers. Their future blueprints and imaginations is clear enough to convince investors and make investors to expect their growth.
