Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim consolidated financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on January 29, 2020. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the content asset amortization policy and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.
The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of the results for a full year.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in prior GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The Company adopted ASU 2016-13 in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the recent coronavirus (COVID-19) pandemic on expected credit losses.
2. Revenue Recognition
The Company's primary source of revenues is from monthly membership fees. Members are billed in advance of the start of their monthly membership and revenues are recognized ratably over each monthly membership period. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities. The Company is the principal in all its relationships where partners, including consumer electronics (“CE”) manufacturers, multichannel video programming distributors (“MVPDs”), mobile operators and internet service providers (“ISPs”), provide access to the service as the Company retains control over service delivery to its members. Typically, payments made to the partners, such as for marketing, are expensed, but in the case where the price that the member pays is established by the partners and there is no standalone price for the Netflix service (for instance, in a bundle), these payments are recognized as a reduction of revenues.
The following tables summarize streaming revenue, paid net membership additions, and paid memberships at end of period by region for the three months ended March 31, 2020 and March 31, 2019, respectively:
United States and Canada (UCAN)
|
|
|
|
|
|
|
|
|
|
|
|
As of/ Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
(in thousands)
|
Revenues
|
|
$
|
2,702,776
|
|
|
$
|
2,256,851
|
|
Paid net membership additions
|
|
2,307
|
|
|
1,876
|
|
Paid memberships at end of period (1)
|
|
69,969
|
|
|
66,633
|
|
Europe, Middle East, and Africa (EMEA)
|
|
|
|
|
|
|
|
|
|
|
|
As of/ Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
(in thousands)
|
Revenues
|
|
$
|
1,723,474
|
|
|
$
|
1,233,379
|
|
Paid net membership additions
|
|
6,956
|
|
|
4,724
|
|
Paid memberships at end of period (1)
|
|
58,734
|
|
|
42,542
|
|
Latin America (LATAM)
|
|
|
|
|
|
|
|
|
|
|
|
As of/ Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
(in thousands)
|
Revenues
|
|
$
|
793,453
|
|
|
$
|
630,472
|
|
Paid net membership additions
|
|
2,901
|
|
|
1,470
|
|
Paid memberships at end of period (1)
|
|
34,318
|
|
|
27,547
|
|
Asia-Pacific (APAC)
|
|
|
|
|
|
|
|
|
|
|
|
As of/ Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
(in thousands)
|
Revenues
|
|
$
|
483,660
|
|
|
$
|
319,602
|
|
Paid net membership additions
|
|
3,602
|
|
|
1,534
|
|
Paid memberships at end of period (1)
|
|
19,835
|
|
|
12,141
|
|
|
|
(1) A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receive Netflix service following sign-up and a method of payment being provided, and that is not part of a free trial or other promotional offering by the Company to certain new and rejoining members. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations generally become effective at the end of the prepaid membership period. Involuntary cancellations, as a result of a failed method of payment, becomes effective immediately. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company’s internal systems, which utilize industry standard geo-location technology.
|
Total U.S. revenues, inclusive of DVD revenues not reported in the tables above, were $2.5 billion and $2.2 billion for the three months ended March 31, 2020 and 2019, respectively. DVD revenues were $64 million and $81 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Deferred revenue consists of membership fees billed that have not been recognized, as well as gift cards and other prepaid memberships that have not been fully redeemed. As of March 31, 2020, total deferred revenue was $987 million, the vast majority of which was related to membership fees billed that are expected to be recognized as revenue within the next month. The remaining deferred revenue balance, which is related to gift cards and other prepaid memberships, will be recognized as revenue over the period of service after redemption, which is expected to occur over the next 12 months. The $62 million increase in deferred revenue as compared to the balance of $925 million for the year ended December 31, 2019 is a result of the increase in membership fees billed due to increased memberships.
3. Earnings Per Share
Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(in thousands, except per share data)
|
Basic earnings per share:
|
|
|
|
Net income
|
$
|
709,067
|
|
|
$
|
344,052
|
|
Shares used in computation:
|
|
|
|
Weighted-average common shares outstanding
|
439,352
|
|
|
436,947
|
|
Basic earnings per share
|
$
|
1.61
|
|
|
$
|
0.79
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
Net income
|
$
|
709,067
|
|
|
$
|
344,052
|
|
Shares used in computation:
|
|
|
|
Weighted-average common shares outstanding
|
439,352
|
|
|
436,947
|
|
Employee stock options
|
13,142
|
|
|
14,975
|
|
Weighted-average number of shares
|
452,494
|
|
|
451,922
|
|
Diluted earnings per share
|
$
|
1.57
|
|
|
$
|
0.76
|
|
Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(in thousands)
|
Employee stock options
|
1,516
|
|
|
652
|
|
4. Cash, Cash Equivalents and Restricted Cash
The following tables summarize the Company's cash, cash equivalents, and restricted cash as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
Cash and cash equivalents
|
|
Other Current Assets
|
|
Non-current Assets
|
|
Total
|
|
(in thousands)
|
Cash
|
$
|
3,100,789
|
|
|
$
|
2,514
|
|
|
$
|
23,536
|
|
|
$
|
3,126,839
|
|
Level 1 securities:
|
|
|
|
|
|
|
|
Money market funds
|
1,751,095
|
|
|
—
|
|
|
253
|
|
|
1,751,348
|
|
Level 2 securities:
|
|
|
|
|
|
|
|
Foreign Time Deposits
|
300,000
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,151,884
|
|
|
$
|
2,514
|
|
|
$
|
23,789
|
|
|
$
|
5,178,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Cash and cash equivalents
|
|
Other Current Assets
|
|
Non-current Assets
|
|
Total
|
|
(in thousands)
|
Cash
|
$
|
3,103,525
|
|
|
$
|
1,863
|
|
|
$
|
22,161
|
|
|
$
|
3,127,549
|
|
Level 1 securities:
|
|
|
|
|
|
|
|
Money market funds
|
1,614,912
|
|
|
—
|
|
|
1,325
|
|
|
1,616,237
|
|
Level 2 securities:
|
|
|
|
|
|
|
|
Foreign Time Deposits
|
300,000
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,018,437
|
|
|
$
|
1,863
|
|
|
$
|
23,486
|
|
|
$
|
5,043,786
|
|
Other current assets include restricted cash for self insurance. Non-current assets include restricted cash related to workers compensation deposits and letter of credit agreements. The fair value of cash equivalents included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
See Note 6 to the consolidated financial statements for further information regarding the fair value of the Company’s senior notes.
There were no material gross realized gains or losses in the three months ended March 31, 2020 and 2019, respectively.
5. Balance Sheet Components
Content Assets, Net
Content assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
Licensed content, net
|
$
|
14,637,502
|
|
|
$
|
14,703,352
|
|
|
|
|
|
Produced content, net
|
|
|
|
|
|
Released, less amortization
|
4,638,736
|
|
|
4,382,685
|
|
In production
|
5,282,350
|
|
|
4,750,664
|
|
In development and pre-production
|
708,301
|
|
|
667,866
|
|
|
10,629,387
|
|
|
9,801,215
|
|
|
|
|
|
Total
|
$
|
25,266,889
|
|
|
$
|
24,504,567
|
|
|
|
|
|
As of March 31, 2020, approximately $5,736 million, $3,760 million, and $2,478 million of the $14,638 million unamortized cost of the licensed content is expected to be amortized in each of the next three years. As of March 31, 2020, approximately $1,645 million, $1,276 million, and $941 million of the $4,639 million unamortized cost of the produced content that has been released is expected to be amortized in each of the next three years.
As of March 31, 2020, the amount of accrued participations and residuals was not material.
The following table represents the amortization of content assets:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(in thousands)
|
Licensed content
|
$
|
1,860,170
|
|
|
$
|
1,774,289
|
|
Produced content
|
623,215
|
|
|
350,397
|
|
Total
|
$
|
2,483,385
|
|
|
$
|
2,124,686
|
|
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Estimated Useful Lives
|
|
|
(in thousands)
|
|
|
Land
|
|
$
|
6,125
|
|
|
$
|
6,125
|
|
|
|
Buildings
|
|
34,459
|
|
|
33,141
|
|
|
30 years
|
Leasehold improvements
|
|
361,648
|
|
|
354,999
|
|
|
Over life of lease
|
Furniture and fixtures
|
|
87,925
|
|
|
87,465
|
|
|
3-15 years
|
Information technology
|
|
249,440
|
|
|
243,565
|
|
|
3 years
|
Corporate aircraft
|
|
109,619
|
|
|
108,995
|
|
|
8 years
|
Machinery and equipment
|
|
43,776
|
|
|
46,415
|
|
|
3-5 years
|
Capital work-in-progress
|
|
194,019
|
|
|
100,521
|
|
|
|
Property and equipment, gross
|
|
1,087,011
|
|
|
981,226
|
|
|
|
Less: Accumulated depreciation
|
|
(436,556
|
)
|
|
(416,005
|
)
|
|
|
Property and equipment, net
|
|
$
|
650,455
|
|
|
$
|
565,221
|
|
|
|
Leases
The Company has entered into operating leases primarily for real estate. These operating leases are included in "Other non-current assets" on the Company's Consolidated Balance Sheets, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Company's Consolidated Balance Sheets. As of March 31, 2020, total right-of-use assets were approximately $1,502 million and total operating lease liabilities were approximately $1,596 million, of which $196 million and $1,400 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. As of December 31, 2019, total right-of-use assets were approximately $1,532 million and total operating lease liabilities were approximately $1,613 million, of which $190 million and $1,423 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less. These leases are not recorded on the Company's Consolidated Balance Sheets. All operating lease expense is recognized on a straight-line basis over the lease term.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's right-of-use assets and related lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
|
(in thousands)
|
Cash paid for operating lease liabilities
|
$
|
57,490
|
|
|
$
|
37,653
|
|
Right-of-use assets obtained in exchange for new operating lease obligations (1)
|
51,824
|
|
|
842,395
|
|
(1) In the three months ended March 31, 2019, the balance includes $743 million for operating leases existing on January 1, 2019.
Other Current Assets
Other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
(in thousands)
|
Trade receivables
|
|
$
|
539,916
|
|
|
$
|
454,399
|
|
Prepaid expenses
|
|
214,350
|
|
|
180,999
|
|
Other receivables
|
|
541,631
|
|
|
524,669
|
|
Total other current assets
|
|
$
|
1,295,897
|
|
|
$
|
1,160,067
|
|
6. Debt
As of March 31, 2020, the Company had aggregate outstanding notes of $14,670 million, net of $110 million of issuance costs, with varying maturities (the "Notes"). Of the outstanding balance, $499 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of December 31, 2019, the Company had aggregate outstanding long-term notes of $14,759 million, net of $114 million of issuance costs. Each of the Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at fixed rates. A portion of the outstanding notes is denominated in foreign currency (comprised of €4,700 million) and is remeasured into U.S. dollars at each balance sheet date (with remeasurement gain totaling $93 million for the quarter ended March 31, 2020).
The following table provides a summary of the Company's outstanding debt and the fair values based on quoted market prices in less active markets as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount at Par
|
|
|
|
|
Level 2 Fair Value as of
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Issuance Date
|
|
Maturity
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
(in millions)
|
|
|
|
|
(in millions)
|
5.375% Senior Notes
|
|
$
|
500
|
|
|
$
|
500
|
|
February 2013
|
|
February 2021
|
|
$
|
507
|
|
|
$
|
518
|
|
5.500% Senior Notes
|
|
700
|
|
|
700
|
|
February 2015
|
|
February 2022
|
|
722
|
|
|
744
|
|
5.750% Senior Notes
|
|
400
|
|
|
400
|
|
February 2014
|
|
March 2024
|
|
426
|
|
|
444
|
|
5.875% Senior Notes
|
|
800
|
|
|
800
|
|
February 2015
|
|
February 2025
|
|
847
|
|
|
896
|
|
4.375% Senior Notes
|
|
1,000
|
|
|
1,000
|
|
October 2016
|
|
November 2026
|
|
1,018
|
|
|
1,026
|
|
3.625% Senior Notes (1)
|
|
1,433
|
|
|
1,459
|
|
May 2017
|
|
May 2027
|
|
1,433
|
|
|
1,565
|
|
4.875% Senior Notes
|
|
1,600
|
|
|
1,600
|
|
October 2017
|
|
April 2028
|
|
1,632
|
|
|
1,670
|
|
5.875% Senior Notes
|
|
1,900
|
|
|
1,900
|
|
April 2018
|
|
November 2028
|
|
2,047
|
|
|
2,111
|
|
4.625% Senior Notes (1)
|
|
1,212
|
|
|
1,234
|
|
October 2018
|
|
May 2029
|
|
1,246
|
|
|
1,378
|
|
6.375% Senior Notes
|
|
800
|
|
|
800
|
|
October 2018
|
|
May 2029
|
|
883
|
|
|
916
|
|
3.875% Senior Notes (1)
|
|
1,323
|
|
|
1,346
|
|
April 2019
|
|
November 2029
|
|
1,303
|
|
|
1,429
|
|
5.375% Senior Notes
|
|
900
|
|
|
900
|
|
April 2019
|
|
November 2029
|
|
942
|
|
|
960
|
|
3.625% Senior Notes (1)
|
|
1,212
|
|
|
1,234
|
|
October 2019
|
|
June 2030
|
|
1,191
|
|
|
1,273
|
|
4.875% Senior Notes
|
|
1,000
|
|
|
1,000
|
|
October 2019
|
|
June 2030
|
|
1,024
|
|
|
1,019
|
|
|
|
$
|
14,780
|
|
|
$
|
14,873
|
|
|
|
|
|
|
|
|
(1) The following Senior Notes have a principal amount denominated in euro: 3.625% Senior Notes for €1,300 million, 4.625% Senior Notes for €1,100 million, 3.875% Senior Notes for €1,200 million, and 3.625% Senior Notes for €1,100 million.
The expected timing of principal and interest payments for these Notes are as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
2020
|
|
December 31, 2019
|
|
(in thousands)
|
Less than one year
|
$
|
1,233,206
|
|
|
$
|
736,969
|
|
Due after one year and through three years
|
2,060,732
|
|
|
2,581,471
|
|
Due after three years and through five years
|
2,502,066
|
|
|
1,705,201
|
|
Due after five years
|
14,791,650
|
|
|
15,699,800
|
|
Total debt obligations
|
$
|
20,587,654
|
|
|
$
|
20,723,441
|
|
Each of the Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. The Company may redeem the Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest and an applicable premium. The Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of certain of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. As of March 31, 2020 and December 31, 2019, the Company was in compliance with all related covenants.
Revolving Credit Facility
As of March 31, 2020, the Company has a $750 million unsecured revolving credit facility ("Revolving Credit Agreement") which matures on March 29, 2024. Revolving loans may be borrowed, repaid and reborrowed until March 29, 2024, at which time all amounts borrowed must be repaid. The Company may use the proceeds of future borrowings under the Revolving Credit Agreement for working capital and general corporate purposes. As of March 31, 2020, no amounts have been borrowed under the Revolving Credit Agreement.
The borrowings under the Revolving Credit Agreement bear interest, at the Company’s option, of either (i) a floating rate equal to a base rate (the “Alternate Base Rate”) or (ii) a rate equal to an adjusted London interbank offered rate (the “Adjusted LIBO Rate”), plus a margin of 0.75%. The Alternate Base Rate is defined as the greatest of (A) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate, (B) the federal funds rate, plus 0.500% and (C) the Adjusted LIBO Rate for a one-month interest period, plus 1.00%. The Adjusted LIBO Rate is defined as the London interbank offered rate for deposits in U.S. dollars, for the relevant interest period, adjusted for statutory reserve requirements, but in no event shall the Adjusted LIBO Rate be less than 0.00% per annum. Regulatory authorities that oversee financial markets have announced that after the end of 2021, they would no longer compel banks currently reporting information used to set the LIBO Rate to continue to make rate submissions. As a result, it is possible that beginning in 2022, the LIBO Rate will no longer be available as a reference rate. Under the terms of the Company's Revolving Credit Agreement, in the event of the discontinuance of the LIBO Rate, a mutually agreed-upon alternate benchmark rate will be established to replace the LIBO Rate. The Company and Lenders shall in good faith establish an alternate benchmark rate which places the Lenders and the Company in the same economic position that existed immediately prior to the discontinuation of the LIBO Rate. The Company does not anticipate that the discontinuance of the LIBO Rate will materially impact its liquidity or financial position.
The Company is also obligated to pay a commitment fee on the undrawn amounts of the Revolving Credit Agreement at an annual rate of 0.10%. The Revolving Credit Agreement requires the Company to comply with certain covenants, including covenants that limit or restrict the ability of the Company’s subsidiaries to incur debt and limit or restrict the ability of the Company and its subsidiaries to grant liens and enter into sale and leaseback transactions; and, in the case of the Company or a guarantor, merge, consolidate, liquidate, dissolve or sell, transfer, lease or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole. As of March 31, 2020 and December 31, 2019, the Company was in compliance with all related covenants.
7. Commitments and Contingencies
Content
As of March 31, 2020, the Company had $19.2 billion of obligations comprised of $4.8 billion included in "Current content liabilities" and $3.2 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $11.2 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.
As of December 31, 2019, the Company had $19.5 billion of obligations comprised of $4.4 billion included in "Current content liabilities" and $3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $11.8 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.
The expected timing of payments for these content obligations is as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
Less than one year
|
$
|
8,618,185
|
|
|
$
|
8,477,367
|
|
Due after one year and through three years
|
8,064,206
|
|
|
8,352,731
|
|
Due after three years and through five years
|
1,974,855
|
|
|
2,041,340
|
|
Due after five years
|
516,792
|
|
|
618,644
|
|
Total content obligations
|
$
|
19,174,038
|
|
|
$
|
19,490,082
|
|
Content obligations include amounts related to the acquisition, licensing and production of content. Obligations that are in non-U.S. dollar currencies are translated to the U.S. dollar at period end rates. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements as well as other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time the Company enters into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of such license agreements. The Company does not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant.
Legal Proceedings
From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations.
The Company is involved in litigation matters not listed herein but does not consider the matters to be material either individually or in the aggregate at this time. The Company's view of the matters not listed may change in the future as the litigation and events related thereto unfold.
Indemnification
In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.
The Company's obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.
It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. No amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.
8. Stockholders’ Equity
Stock Option Plan
In June 2011, the Company adopted the 2011 Stock Plan. The 2011 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants.
A summary of the activities related to the Company’s stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Shares
Available
for Grant
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
(per share)
|
Balances as of December 31, 2019
|
6,111,561
|
|
|
20,859,326
|
|
|
$
|
124.28
|
|
Granted
|
(581,455
|
)
|
|
581,455
|
|
|
354.55
|
|
Exercised
|
—
|
|
|
(973,969
|
)
|
|
45.77
|
|
Expired
|
—
|
|
|
(48
|
)
|
|
9.96
|
|
Balances as of March 31, 2020
|
5,530,106
|
|
|
20,466,764
|
|
|
$
|
134.56
|
|
Vested and exercisable as of March 31, 2020
|
|
|
20,466,764
|
|
|
$
|
134.56
|
|
The aggregate intrinsic value of the Company's outstanding stock options as of March 31, 2020 was $4,937 million and represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the first quarter of 2020. This amount changes based on the fair market value of the Company’s common stock. The weighted-average remaining contractual term of the Company's outstanding stock options as of March 31, 2020 included in the table above was 5.57 years.
A summary of the amounts related to option exercises, is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(in thousands)
|
Total intrinsic value of options exercised
|
$
|
303,226
|
|
|
$
|
180,842
|
|
Cash received from options exercised
|
43,694
|
|
|
22,972
|
|
Stock-based Compensation
Stock options granted are exercisable for the full ten year contractual term regardless of employment status. The following table summarizes the assumptions used to value option grants using the lattice-binomial model and the valuation data:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Expected volatility
|
37
|
%
|
|
41
|
%
|
Risk-free interest rate
|
1.71
|
%
|
|
2.74
|
%
|
Suboptimal exercise factor
|
3.34
|
|
|
3.07
|
|
Weighted-average fair value (per share)
|
$
|
167
|
|
|
$
|
163
|
|
Total stock-based compensation expense (in thousands)
|
$
|
97,019
|
|
|
$
|
101,200
|
|
Total income tax impact on provision (in thousands)
|
$
|
21,309
|
|
|
$
|
21,628
|
|
The Company considers several factors in determining the suboptimal exercise factor, including the historical and estimated option exercise behavior.
The Company calculates expected volatility based solely on implied volatility. The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions, and given consistently high trade volumes of the options, can reasonably be expected to be a better indicator of expected volatility than historical volatility of its common stock.
In valuing shares issued under the Company’s employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.
9. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
|
(in thousands, except percentages)
|
Provision for income taxes
|
|
$
|
86,803
|
|
|
$
|
55,607
|
|
Effective tax rate
|
|
11
|
%
|
|
14
|
%
|
In connection with the Tax Cuts and Jobs Act of 2017 the Company simplified its global corporate structure, effective April 1, 2019. The tax impacts of such simplifications were not material to the financial statements taken as a whole.
The effective tax rate for the three months ended March 31, 2020 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, Federal and California research and development (“R&D”) credits, and the international provisions of U.S. tax reform that became effective in 2018, partially offset by state taxes, foreign taxes, and non-deductible expenses. The effective tax rate for the three months ended March 31, 2019 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, Federal and California R&D credits, and effects of the international tax provisions from U.S. tax reform that became effective in 2018, partially offset by state taxes, foreign taxes, and non-deductible expenses.
The decrease in effective tax rate for the three months ended March 31, 2020, as compared to the same period in 2019 was primarily due to changes from the global corporate structure simplification, offset by a lower benefit on a percentage basis for excess tax benefits of stock-based compensation and Federal and California R&D credits due to higher pre-tax income. For the three months ended March 31, 2020, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $65 million, compared to the three months ended March 31, 2019 of $41 million.
Gross unrecognized tax benefits were $71 million and $67 million as of March 31, 2020 and December 31, 2019, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $60 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of March 31, 2020, gross unrecognized tax benefits of $19 million were classified as “Other non-current liabilities” and $52 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision for income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision for income taxes” were not material in any of the periods presented.
Deferred tax assets of $612 million and $658 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The Company has a valuation allowance of $132 million and $135 million as of March 31, 2020 and December 31, 2019, respectively. The valuation allowance is primarily related to certain foreign tax credits that are not likely to be realized.
The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for 2016, 2017, and 2018. The 2011 through 2018 state tax returns are subject to examination by state tax authorities. The Company is also currently under examination in the U.K. for 2018 and 2019. The Company has no other significant foreign jurisdiction audits underway. The years 2014 through 2019 remain subject to examination by foreign tax authorities.
Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
10. Segment and Geographic Information
The Company operates as one operating segment. The Company's chief operating decision maker ("CODM") is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
Total U.S. revenues were $2.5 billion and $2.2 billion for the three months ended March 31, 2020 and March 31, 2019, respectively. See Note 2 Revenue Recognition for additional information about streaming revenue by region.
The Company's long-lived tangible assets, as well as the Company's operating lease right-of-use assets recognized on the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, were located as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
2020
|
|
December 31, 2019
|
|
(in thousands)
|
United States
|
$
|
1,573,683
|
|
|
$
|
1,503,459
|
|
International
|
579,092
|
|
|
594,047
|
|