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NETFLIX INCFORM 8-K(Current report filing)Filed 10/16/18 for the Period Ending 10/16/18Address 100 WINCHESTER CIRCLE.LOS GATOS, CA, 95032Telephone 408-540-3700CIK 0001065280Symbol NFLXSIC Code 7841 - Services-Video Tape RentalIndustry Internet ServicesSector TechnologyFiscal Year 12/31edgar-online Copyright 2018, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved.Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use.SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_FORM 8-KCurrent ReportPursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934Date of Report (Date of earliest event reported):October 16, 2018_NETFLIX, INC.(Exact name of registrant as specified in its charter) Delaware001-3572777-0467272(State or other jurisdictionof incorporation)(CommissionFile Number)(I.R.S. EmployerIdentification No.)100 Winchester CircleLos Gatos, CA95032(Address of principal executive offices)(Zip Code)(408) 540-3700(Registrants telephone number, including area code)(Former name or former address, if changed since last report)_Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the followingprovisions:oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)mmunications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (230.405 of this chapter) orRule 12b-2 of the Securities Exchange Act of 1934 (240.12b-2 of this chapter).Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Item 2.02 Results of Operations and Financial Condition.On October 16, 2018 Netflix, Inc. (the “Company”) announced its financial results for the quarter ended September 30, 2018 . The Letter to Shareholders,which is attached hereto as Exhibit 99.1 and is incorporated herein by reference, includes reference to the non-GAAP financial measures of free cash flow andEBITDA. Generally, a non-GAAP financial measure is a numerical measure of a companys performance, financial position, or cash flows that either excludes orincludes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generallyaccepted accounting principles in the United States. Management believes that the non-GAAP measures of free cash flow and EBITDA are important liquiditymetrics because they measure, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certainother activities or the amount of cash used in operations, including investments in global streaming content. However, these non-GAAP measures should beconsidered in addition to, not as a substitute for or superior to, net income, operating income, diluted earnings per share and net cash provided by operatingactivities, or other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of these non-GAAP measures are contained intabular form in Exhibit 99.1.The information in this report shall not be treated as “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemedincorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, exceptas expressly stated by specific reference in such filing.Item 9.01 Financial Statement and Exhibits.(d) Exhibit 99.1Letter to Shareholders dated:October 16, 2018SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersignedhereunto duly authorized. NETFLIX, INC.Date:October 16, 2018 /s/ David WellsDavid WellsChief Financial OfficerEXHIBIT INDEXExhibit No. Description of Exhibit 99.1*Letter to Shareholders dated: October 16, 2018*This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934.The Letter to Shareholders will be attached as Exhibit 99.1.Exhibit 99.1October 16, 2018Fellow shareholders,Our broad slate of original programming helped drive a solid quarter of growth with streaming revenue increasing 36% year over year andglobal membership surpassing 130 million paid and 137 million total. Were thrilled to be growing internet entertainment across the globe. (in millions except per share data and Streaming Content Obligations)Q317Q417Q118Q218Q318Q418 ForecastTotal (Including DVD): Revenue$2,9853,286$3,7013,907$3,9994,199Y/Y % Growth30.3%32.640.4%40.334.0%27.8Operating Income209245447462481205Operating Margin7.07.512.111.812.04.9Net Income130186290384403105Diluted EPS$0.290.41$0.640.85$0.890.23 Total Streaming:Revenue2,8753,1813,6023,8143,9114,114Y/Y % Growth33.2%35.343.2%42.836.0%29.3Paid Memberships104.02110.64118.90124.35130.42138.02Paid Net Additions4.996.628.265.456.077.60Total Memberships109.25117.58125.00130.14137.10146.50Net Additions5.308.337.415.156.969.40 US Streaming:Revenue$1,5471,630$1,8201,893$1,9371,995Contribution Profit554561697740762663Contribution Margin35.8%34.438.3%39.139.3%33.2Paid Memberships51.3552.8155.0955.9656.9658.46Paid Net Additions1.021.472.280.871.001.50Total Memberships52.7754.7556.7157.3860.26Net Additions0.851.981.960.671.091.80 International Streaming:Revenue$1,3271,550$1,7821,921$1,9732,119Contribution Profit (Loss)62135272298338211Contribution Margin4.7%8.715.3%15.517.1%10.0Paid Memberships52.6857.8363.8268.3973.4679.56Paid Net Additions3.975.165.984.585.076.10Total Memberships56.4862.8368.2972.7678.6486.24Net Additions4.456.365.464.475.877.60 Consolidated:Net cash (used in) operating activities$(420)(488)$(237)(518)$(690)Free Cash Flow(465(524(287(559(859 EBITDA273313534563584Shares (FD)447.4448.1450.4451.6451.9Streaming Content Obligations* ($B)17.017.717.918.418.6 *Corresponds to our total known streaming content obligations as defined in our financial statements and related notes in our most recently filed SEC Form 10-K1Q3 Results and Q4 ForecastStreaming revenue grew 36% year over year in Q3, as average paid membership increased 25% and ASP rose 8%. International revenueincluded a -$90 million year over year impact from currency. Excluding the impact of F/X, international ASP rose 11% year over year and 2%sequentially.Operating margin expanded 500 bps year over year to 12%. This exceeded our forecast of 10.5% due to the timing of content and marketingspend, a portion of which moved into Q4. EPS of $0.89 vs. $0.29 last year included an $8 million non-cash unrealized gain from F/Xremeasurement on our Eurobond and a $38 million tax benefit related to adjustments to the transition tax on the repatriation of foreignearnings and the remeasurement of certain deferred tax assets (both related to true-ups from the 2017 US tax reform).As a reminder, the quarterly guidance we provide is our internal forecast at the time we report and we strive for accuracy in our forecast.This means in some quarters we will be high and other quarters low relative to our guidance. This quarter, we under-forecastedmemberships. Total net additions of 7.0m (up 31% vs. 5.3m last year) was higher than our forecast of 5.0m, and represented a new Q3record. The variance relative to forecast was due to greater-than-expected acquisition globally, with strong growth broadly across all ourmarkets including Asia.For Q4, we forecast paid net additions of 7.6m, and total net additions of 9.4m, up 15% and 13% compared with 6.6m and 8.3m in Q4 lastyear. Were still targeting operating margin to be at the lower end of the 10%-11% range for the full year 2018. This means that in Q4 weexpect operating margin will dip to 5% from 7.5% in the year ago quarter. As we have written in previous letters, this sequential decline inoperating margin in the second half of 2018 is due to the timing of content spend and a higher mix of original films in Q418 (filmamortization is more accelerated than series amortization due to more front-loaded viewing). We would have preferred our operatingmargin to have been a little steadier over the course of the year, and we will target a little less quarterly variance next year in our progressto our full year target of 13% (assuming no major FX moves).Next quarter, we expect to reclassify certain personnel costs from G a year after that, in 2020, well ceasereporting on end-of-quarter free trial count. We will show the weekly paid net adds graph, as above on the right, in each earnings lettergoing forward. We expect this additional disclosure will be helpful to your understanding of our business, in particular, how steady our paidmembership growth is in the near term.ContentWe have three major categories of content: licensed non-first-window content such as Shameless , licensed original first-window contentsuch as Orange is the New Black (owned and developed by Lionsgate), and now owned original first-window content from the Netflixstudio, such as Stranger Things . Within those categories there are lots of subdivisions and per-territory treatments, but those are the bigthree buckets.It was just two years ago when we began building the third category: a film and TV studio within Netflix. Some of our notable owned-titlesin addition to include : Big Mouth, The Ranch , Bright Godless , The Kissing Booth , 3% Dark , Sacred Games and Nailed It .In addition to reducing our reliance on outside studios, this initiative provides us with greater control over the content we create (e.g., longterm global rights), the ability to strengthen title-brand-love and franchise value (like consumer products) and potentially lower costs (as wecan avoid the markup 3rd party studios charge us). To do this, weve had to develop new capabilities to manage the entire productionprocess from creative support, production planning, crew and vendor management to visual effects, to name a few.Today, we employ hundreds of people in physical production, working on a wide variety of owned titles spread across scripted andunscripted series, kids, international content, standup, docs and feature films from all over the world. To support our efforts, well needmore production capacity; we recently announced the selection of Albuquerque, New Mexico 1 as the site of a new US production hub,where we anticipate bringing $1 billion dollars in production over the next 10 years and creating up to 1,000 production jobs per year. Ourinternal studio is already the single largest supplier of content to Netflix (on a cash basis)._1 ktla/2018/10/08/netflix-finalizing-new-production-hub-in-new-mexico/3We strive to offer a wide breadth of programming because we want to maximize the size of our membership base and people have verydiverse tastes that we seek to satisfy. This also reduces our dependence on any individual title. Even our largest titles, which are viewed bytens of millions of our members, only account for a low single digit percentage of total streaming hours. Therefore, the vast majority of ourgrowth in any given quarter is not attributable to any one piece of content, as you can see by the steadiness in our paid net additions.This past quarter, in original series, we launched new seasons of Orange is the New Black , Ozark Marvels Luke Cage and debutedInsatiable . Late in the quarter, we released Maniac , a limited series starring Emma Stone and Jonah Hill. We have also been ramping upour animated adult comedy offering. In Q3, we successfully premiered Disenchantment , from Matt Groening who created The Simpsonsand Futurama , and Paradise PD , from the makers of Brickleberry , to complement Big Mouth Bojack Horseman and F is for Family .We also continue to expand our international originals, with projects spanning India, Mexico, Spain, Italy, Germany, Brazil, France, Turkeyand throughout the Middle East to just name a few. In India, our hit series Sacred Games was followed up by Ghoul in late August. La Casade las Flores , our latest Mexican original, has become a big hit.As part of our Summer of Love 2 and building on the success of Set It Up and The Kissing Booth , we released original films Like Father(starring Kristen Bell and Kelsey Grammer in a daughter-father dramedy), Sierra Burgess Is a Loser (starring Stranger Things Barb, ShannonPurser) and To All the Boys Ive Loved Before , which is one of our most viewed original films ever with strong repeat viewing. More than 80million accounts have watched one or more of the Summer of Love films globally and we are already in production for the next set oforiginal rom-coms for our members.This December, well be launching ROMA , 3 from Oscar-winning director Alfonso Cuarn. We support simultaneous release in cinema andon Netflix, and the film will debut on Netflix and on over 100 screens worldwide, just as we are doing currently with 22 July , 4 from Oscar-nominated director Paul Greengrass. We believe in our member-centric simultaneous release model for our original films and welcomeadditional theatre chains that are open to carrying our films to provide the shared-viewing, big-screen experience to their customers whoenjoy that option.Weve come a long way in the five years since launching original content on Netflix. In addition to our commercial success, were ecstaticwhen the creators we work with are recognized for their inspiring work. This year, Netflix originals led with 112 Emmy nominationsspanning 40 of our shows, docs and specials across nearly every category and were humbled to have tied HBO with the most number ofEmmy wins with 23.Were also thrilled that Netflix has been a launching pad for a new generation of global stars like Millie Bobby Brown, Jacob Elordi, NoahCentineo and Gaten Matarazzo. When our service helps our talent develop huge fan bases (from small followings to over 10 millionInstagram followers), we can attract the best talent in the world. This explosive growth in popularity is a good indicator that our shows andstars are breaking out around the planet._2 forbes/sites/danafeldman/2018/06/20/its-the-summer-of-love-netflix-r
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