Netflix Analysis

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Historical Financial Analysis
Time Series Analysis (Detailed in Exhibits 9-11)
Overall, the historical financial statements of Netflix are characteristic of a company entering its growth stage. Revenues have grown at a rapid pace over the past five years, increasing from $996 million in FY 2006 to $1.6 billion in FY 2009. Assets have increased slightly over the same time period, to $663 million. Netflix is currently growing at a more rapid pace than it has in the company’s history, which dates back to 1997. Netflix appears like a company that has figured out its business model and is looking to build upon that model. When analyzing Netflix’s income statement, the most obvious factor standing out is that the company’s earnings have increased rapidly over the past five years, more than doubling from FY 2005 to FY 2009. Much of this growth can be attributed to increasing revenues. Earnings growth can also be attributed to improving margins as the additional revenues come without additions to its fixed assets. In FY 2009, its EBIT percentage was 11.89% and the net margin was 6.94%. Each of these margins has increased by a couple of percentage points in comparison with prior years. Important items to look at in the internet retailing industry are revenues, gross margin, and operating expenses. Material costs in Netflix’s business are its cost of goods sold, depreciation, and SG&A expenses. Cost of goods sold represents about half of the company’s total revenue. It is notable that this expense increased by 2 percentage points relative to Netflix’s revenues. This increase may be due to a shift in its business strategy to emphasize its digital streaming offerings to consumers. Depreciation represents about 15% of total revenues. There was a spike of a couple of percentage points in 2007 and 2008, but it has declined again in 2009. We will look into this trend further when we examine the cash flow statement. SG&A is the second largest expense for Netflix. While it has increased on a dollar basis almost every year, it has decreased as a percentage of revenue. This reflects the fact that some of Netflix’s fixed costs are being spread out across a higher subscriber base. The balance sheet has not grown proportionally with the increase in earnings or revenue. Total assets increased from $608 million in 2006 to $679 million at the end of 2009. A notable fact to examine is the company’s issuance of long term debt in 2008 and 2009. Combined with the company’s stock repurchase plan in late 2009, this issuance has greatly altered the company’s capital structure from a company relying exclusively on equity financing to one that now uses long term debt. We will examine leverage when looking at the financial ratios. Important items to examine in the industry are inventory levels and net cash position. In Netflix’s case, there is no inventory because the company provides a rental service where the deliverable is content acquired from media companies. The company’s net cash position is currently positive in 2009, but has declined significantly as a result of long term debt issuance. As Netflix currently holds over $320 million in cash and marketable securities, its liquidity position remains strong. Cash represents about half of total assets and current assets are about two thirds of the total. Another important item to note is the high level of intangible assets on the balance sheet, $110 million in 2009. Netflix has been generating positive cash flows from operations since FY 2001 However; the company’s overall cash position has been decreasing since 2006. Netflix has been investing cash heavily over this time period in order to fuel additional growth. A large proportion of cash used for investing is for the purchase of DVDs for Netflix’s content library. In 2009, Netflix purchased $193 million in DVDs. In addition to cash used for investments, Netflix has also engaged in a stock repurchase plan...
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