Netflix Financial Analysis Report: An In-depth Accounting Review

This report offers a comprehensive financial analysis of Netflix, utilizing data extracted from their 2017 10-K/A filing with the SEC. It identifies and discusses major sources of operating revenues, primarily focusing on streaming membership fees from domestic and international customers, and expenses, including content development, marketing, and technology. Significant changes in revenues and expenses between 2016 and 2017 are analyzed, highlighting the growth in international streaming subscriptions and increased content amortization costs. The report also examines key balance sheet components, such as current and non-current content assets and liabilities, alongside long-term debt, noting the substantial increase in content-related assets and liabilities. Finally, it compares Netflix's book value of equity to its market value, revealing a significant disparity attributed to investor expectations of high future earnings potential. The analysis underscores Netflix's financial strategies and performance within the dynamic content streaming industry.

ACCOUNTING FINANCIAL ANALYSIS REPORT
NETFLIX
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1. Income Statement
 There are three major sources of operating revenue for the company namely monthly
membership fee for streaming content from domestic customers, monthly membership
for streaming content from international customers and monthly membership fee for
DVD from domestic customers. About 95% of the revenues is derived from
membership fees related to streaming content with about 5% revenues being derived
by DVD related membership service. With regards to streaming content membership
fee, the domestic customers have a slightly greater share than international customers.
There are three main expenses i.e. content development, marketing and technology &
development and in decreasing order of magnitude. The major chunk amount of
money is spent with regards to development and licensing of content. The company
spends significantly on marketing in order to enhance the membership especially in
international markets where the company is witnessing rapid growth. Also, spending
is done on underlying technology so as the content can be enjoyed by the consumers.
 The income statement of the company does contain all the major items that would be
expected from a company operating in the content streaming business. To begin with
there is revenues collected from members. The major cost for the company with
regards to the content is captured in the cost of revenues. Related advertising spent
and payment of partners is captured in marketing payment. Further, the expenses
related to R&D to improve service offerings are reflected in technology &
development. Finally, the administrative expenses along with the interest expenses are
also reflected. Further, the income tax expense is deducted to yield profit after tax.
 When compared to 2016, the revenues of the company for 2017 have witnessed an
increase in excess of 30%. This is mainly on account of significant growth in the
streaming content based subscription fee especially from international markets where
a y-o-y growth in excess of 50% has been witnessed. The streaming content
membership fee has shown an increase in excess of 10% for the domestic consumers
also. On the other hand, the revenue from DVD business has declined in 2017 as
compared to 2016. The cost of revenue has also witnessed a significant increase in
line with the revenue growth. This is also primarily on the increase in the subscription
base comprising of international consumers which has enhanced content based

amortization in excess of 50% in international markets. Even for domestic customers
for content streaming, cost of revenues has increased owing to higher subscribers. The
marketing expense of the company has also increased by more than 15% on a y-o-y
basis in an attempt to increase the subscription base for streaming content. The
general and administrative expense has also witnessed a rise by over 40% in 2017
over the corresponding figure in 2016.
 A particular non-operating item that appears on the income statement is interest and
other income (expense) which essentially is on account of the interest earned on the
cash in hand and potentially other investments. Considering the fact that it has
continued to appear in the income statement every year, hence it is expected to
continue in the future also particularly considering that the company would have non-
operating income and related expenses which would need to be captured.
2. Balance Sheet
 The major current assets are cash & cash equivalents ($ 2.82 billion) and current
content assets ($ 4.31 billion). The major non-current assets are non-current content
assets ($ 10.37 billion). The major current liabilities are in the form of current content
liabilities ($ 4.17 billion). The major non-current liabilities are in the form of long
term debt ( $ 6.5 billion) and non-current content liabilities ($ 3.33 billion).
 The balance sheet of the company is in line with expectations. With regards to current
assets, there are no receivables since there is advance payment in the subscription
model. Further, the largest two current assets are current content asset and cash.
Similarly, in case of non-current assets, property and equipment are significantly
lower with more than 80% of the non-current asset comprising of long term content.
Similarly, on the liabilities side, the short term and long term content based liabilities
are significant besides the long term debt. Various common elements of equity are
also mentioned.
 The contingent liability captured in the notes to the financial statements amount of $
10.2 billion as on December 31, 2017. These essentially relate to content and have not

been recognised in the balance sheet since they do not satisfy the criteria related to
asset recognition. Majority of this are related to production or licensing of content
which the company aims to obtain in the future. These items are reflected in the
balance sheet once the title is obtained by the company. Also, the company has
entered into agreements with regards to TV series where the amount of future
obligations is unknown but substantial.
 There has been significant increase in the current and non-current content assets for
the company as on December 2017 compared to December 2016. This is on account
of the company purchasing and licensing more content based asset considering the
rising subscriber base that it is witnessing especially in international markets. There is
a sizable increase in the cash & cash equivalents which is on account of debt inflows
to the tune of $ 3 billion. Owing to increased borrowing to the tune of $ 3.02 billion,
the long term debt has practically doubled. Additionally, the current and non-current
liabilities related to content have also shown significant increase which is on expected
lines considering the content expansion spree. Also, the company has issued
incremental stock to the tune of $ 88.38 million in the year ending on December 31,
2017.
3. BOOK VALUE vs MARKET VALUE
 The book value of common stockholders’ equity as on December 31, 2017 is $ 3.58
billion.
 The market value of common stockholders’ equity as on December 31, 2017 can be
computed as shown below.
Closing price of Netflix Inc as on December 31, 2017 = $ 191.96
Total outstanding shares = 433,392,686
Market value = $ 191.96 *433,392,686 = $ 83.19 billion
 From the above analysis it is apparent that the market value of common stockholders’
equity is significantly higher than the corresponding book value. This difference may
be attributed to the value that the investors are placing on the earning potential of the
company. Typically such companies tend to create wealth for the shareholders. Also,

it is noteworthy that in the balance sheet, the stock is recorded at the initial issue price
and does not reflect the market value. The market value of the stock is a function of
the present performance of the stock and the future earnings potential that it is
expected to deliver. The vast difference between the book value and market value of
the company is indicative of the high earning potential of the company that investors
and market participants perceive.