Financial Analysis of Netflix - Essay Example

Netflix Headquartered in California, Netflix is currently the world’s leading provider of movies and television on the internet. Founded in 1997, Netflix today has over 30 million subscribers in over 10 countries (Netflix, 2012). The subscription based digital service was started in 1999 and Netflix now offers a collection of over 10,000 DVDs to its subscribers. (Netflix, 2012)Netflix initially offered the traditional rent per DVD model which wasn’t very successful especially because of the $2 late fees clause. In 1999, monthly subscriptions model was introduced and the reputation of the firm grew as a flat- fee rental with no due dates and late fee. Netflix has to its credit the personalized movie recommendation system which suggests choices to users based on their previous purchases. Also mentionable is the fact that Netflix user base has increased every year from the date its conception by over 50% from past years till 2005. After 2005, the number of subscribers continued to increase but at lower rates. (Netflix, 2012) Netflix also partnered with certain electronics companies to make streaming possible on the PS3, TVs with internet connections, Xbox 360, Apple iPhones, iPads, iPods and other internet connected devices. (Netflix, 2012) Researches showed that in 2011, 61% of the digital video market clintele belongs to Netflix. (Stambar, 2011) in 2011, Netflix is the highest revenue earner in the United States. (Frankel, 2012) This data clearly shows that as of right now, Netflix is a market leader. INCOME STATEMENT (Business Week, 2012)   31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 Revenues 1,364.70 1,670.30 2,162.60 3,204.60 TOTAL REVENUES 1,364.70 1,670.30 2,162.60 3,204.60 Cost of Goods Sold 910.2 1,079.30 1,357.40 2,039.90 GROSS PROFIT 454.4 591 805.3 1,164.70 Selling General & Admin Expenses 249.4 286.6 358.3 520.6 R&D Expenses 89.9 114.5 163.3 259 Other Operating Expenses -6.3 -- -- -- OTHER OPERATING EXPENSES 332.9 401.2 521.6 779.6 OPERATING INCOME 121.5 189.8 283.6 385.1 Interest Expense -2.5 -6.5 -19.6 -20 Interest and Investment Income 9.2 4.8 2.7 2.8 NET INTEREST EXPENSE 6.7 -1.6 -16.9 -17.2 Other Non-Operating Income 0.1 -- -- -- EBT, EXCLUDING UNUSUAL ITEMS 128.4 188.2 266.7 367.8 Gain (Loss) on Sale of Investments 3.1 1.9 1 0.7 Other Unusual Items, Total -- 2.1 -- -9 Legal Settlements -- 2.1 -- -9 EBT, INCLUDING UNUSUAL ITEMS 131.5 192.2 267.7 359.5 Income Tax Expense 48.5 76.3 106.8 133.4 Earnings from Continuing Operations 83 115.9 160.9 226.1 NET INCOME 83 115.9 160.9 226.1 Talking about the income statement of Netflix, the trend of revenues has certainly taken a great boost since 2006 from 1365 million dollars to 3205 million dollars in 2011. Growth in revenue certainly is a positive sign for any company. Netflix has achieved huge numbers during the four years. The cost of sales has also risen but looking at the overall gross profit margin, we see a rising trend. Expanses look pretty much under control and would not had been a point of concern for Netflix. The change in the income statement which was very obvious was the interest charges which rose by big number from (1.6) in the year 2008 to (16.9) in 2010 and (20) in 2011. This means that Netflix has taken huge amount of loans in 2010 and have retained them in 2011 as well. In the income statement, we can also see that the investment’s income earned has also decreased since 2006. This means that Netflix have taken out all the investments it had made outside its company. Net income also shows a positive growing trend. From the income statement, we can say that Netflix is growing and has profitable numbers. BALANCE SHEET (Business Week, 2012)   31-Dec 31-Dec 31-Dec 31-Dec Currency in Millions of US$ 2008 2009 2010 2011 Assets         Cash and Equivalents 139.9 134.2 194.5 508.1 Short-Term Investments 157.4 186 155.9 289.8 TOTAL CASH AND SHORT TERM INVESTMENTS 297.3 320.2 350.4 797.8 Prepaid Expenses 26.5 26.7 62.2 56 Deferred Tax Assets, Current -- -- 2.2 10 Restricted Cash -- -- -- 1 Other Current Assets 35.1 64 222.4 966 TOTAL CURRENT ASSETS 358.9 411 637.2 1,830.90 Gross Property Plant and Equipment 223.8 265.9 265.1 306 Accumulated Depreciation -98.8 -134.3 -136.6 -169.7 NET PROPERTY PLANT AND EQUIPMENT 124.9 131.7 128.6 136.4 Long-Term Investments 5.7 -- -- -- Deferred Tax Assets, Long Term 22.4 16 17.5 28.3 Deferred Charges, Long Term -- 6 -- 6.4 Other Intangibles 100.4 110.4 181 1,046.90 Other Long-Term Assets 3.1 4.7 17.8 20.4 TOTAL ASSETS 615.4 679.7 982.1 3,069.20 LIABILITIES & EQUITY         Accounts Payable 100.3 92.5 222.8 1,012.60 Accrued Expenses 22.7 27.6 29.5 41.6 Current Portion of Long-Term Debt/Capital Lease 1.2 1.4 2.1 2.3 Current Portion of Capital Lease Obligations 1.2 1.4 2.1 2.3 Other Current Liabilities, Total 8.6 5.8 7 19.8 Unearned Revenue, Current 83.1 100.1 127.2 148.8 TOTAL CURRENT LIABILITIES 216 227.4 388.6 1,225.10 Long-Term Debt -- 200 200 400 Capital Leases 38 36.6 -- 31.8 Other Non-Current Liabilities 14.3 16.6 103.3 769.5 TOTAL LIABILITIES 268.3 480.6 691.9 2,426.40 Common Stock 0.1 0.1 0.1 0.1 Additional Paid in Capital 338.6 -- 51.6 219.1 Retained Earnings 108.5 198.8 237.7 422.9 Treasury Stock -100 -- -- -- Comprehensive Income and Other 0.1 0.3 0.8 0.7 TOTAL COMMON EQUITY 347.2 199.1 290.2 642.8 TOTAL EQUITY 347.2 199.1 290.2 642.8 TOTAL LIABILITIES AND EQUITY 615.4 679.7 982.1 3,069.20 Looking at the balance sheet, we can clearly see increase in cash in the year 2011. Secondly, there is a huge amount in intangible assets. This means that Netflix has made a huge amount of goodwill to its name in 2011. Coming to the liability section, we can see that the accounts payable for Netflix has increased by 6 times in the duration of one year 2010-2011. Long term debt has also double and common shares have increased almost three times in the same year. It is true that debt has increased, but so has equity. This means that Netflix became more of an equity oriented company. RATIOS (Bar Chart, 2012)   2011 2010 2009 2008 2007 2006 Earnings/Share 4.26 2.96 1.98 1.32 0.97 0.71 Profit Margin, % 7.06 7.44 6.94 6.08 5.55 4.92 Return on Equity, % 35.18 55.43 58.18 23.91 15.54 11.85 Return on Assets, % 7.37 16.38 17.05 13.43 10.35 8.06 Price/Sales 1.3 2.85 1.45 1.23 1.19 0 Price/Earnings 45.18 39.79 22.35 21.71 22.55 0 Debt/Equity 0.62 0.69 1 0 0 0 Interest Coverage 18.96 14.64 30.7 54.67 0 0 Book Value, $ 11.61 5.55 3.64 5.92 6.55 6.05 Increase in earnings per share means that the company is making profits and that the returns for the shareholders have now increased. Profit margins have reduced in 2011 as compared to 2010 but the overall trend is of increase in the profit margin. However, the strongest factor that will result in people considering their investment decisions is the huge dip in return on equity in 2011 as compared to 2009. Return on assets shows a decrease from the year 2009. This can be because the company either is not managing its assets efficiently or it has bought more assets then it should actually have. High price/earnings ratio means that the investors are expecting high profitability and more growth from Netflix. The bigger picture shows that Netflix is a good stock to invest in for it offers increasing earnings, shown through the EPS, to its investors. The role of corporate governanvce is to have a set of rules, procedures and policies that would help achieve the company’s goals and objectives. The aim is to add value to the company so that stockholder benefit is maximised. Good coporate governance is one of the important criteria a company is judged upon by potentialo investors and helps obtaining capital at lower prices(Thomson). Netflix by its own admission is comitted to good governance. Its board of directors are completely independent designing policies where by communication with the stockholders is given prime importance. All stockholders are provided with a link whereby they can send e-mails to the company. The comoany’s general counsel regualrly goes through this inbox forwarding mails to the concerned memebers of the board. (Netflix, 2012) However it is argues that many of Netflin policies are aimed at self preservation rather than on stockholders benefit. The policy limiting stochholders say in the appointment of board members(they are allowed to chose few and not all members on the board) is not widely popular. Netflix decision to use a poison pill is also receiving criticism and being termed as bad governance. Also the AGR score of 3 for netflix raises some concerns over the fact that the company has higher governance and accoutiong risk than that companies in the same industry. (GMI Ratings, 2012) Bibliography Bar Chart, 2012. Netflix (NFLX). [Online] Available at: http://www.barchart.com/profile.php?sym=NFLX&view=ratios [Accessed 23 11 2012]. Business Week, 2012. netflix inc. [Online] Available at: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=NFLX&dataset=balanceSheet&period=A¤cy=native [Accessed 23 11 2012]. Frankel, D., 2012. Report: Netflix Beats Apple as No.1 Online Movie Supplier. [Online] Available at: http://paidcontent.org/2012/06/01/report-netflix-beats-apple-as-no-1-online-movie-supplier/ [Accessed 23 11 2012]. GMI Ratings, 2012. GMI Ratings Governance Update | Netflix, Inc.. [Online] Available at: http://www3.gmiratings.com/home/2012/11/gmi-ratings-governance-update-netflix-inc/ [Accessed 8 11 2012]. Netflix, 2012. Company Facts. [Online] Available at: https://signup.netflix.com/MediaCenter/Facts [Accessed 23 11 2012]. Netflix, 2012. Company Timeline. [Online] Available at: https://signup.netflix.com/MediaCenter/Timeline [Accessed 23 11 2012]. Netflix, 2012. Compnay Overview. [Online] Available at: https://signup.netflix.com/MediaCenter/Overview [Accessed 23 11 2012]. Netflix, 2012. Corporate Governance. [Online] Available at: http://ir.netflix.com/governance.cfm [Accessed 23 11 2012]. Netflix, 2012. Netflix. [Online] Available at: https://signup.netflix.com/MediaCenter/Timeline [Accessed 23 11 2012]. Stambar, Z., 2011. Netflix Dominates Digital Video Retailing. [Online] Available at: http://www.internetretailer.com/2011/03/15/netflix-dominates-digital-video-retailing [Accessed 23 11 2012]. Thomson, Lisa Mary. "What is Corporate Governance?." The Economic Times [Mumbai] 18 Jan. 2009: n. pag. The Economic Times. Web. 23 Nov. 2012. Read More