Understanding Financial Statements

Find the information for this case in the file “2. Netflix FY21 10-K Excerpts.pdf”. Using only the provided financial statement excerpts from Netflix’s FY21 10-K, answer the questions below.

• Use Porter’s Five Forces to analyze Netflix and its position in the industry. Be sure to use information from the Item 1 disclosures from the 10-K in your assessment. (Your answer should be succinct and can be presented in an exhibit style format.)
• What is the book value of equity of Netflix as of the end of fiscal years 2020 and 2021?
• What is Netflix’s market value of equity as of the end of fiscal year 2021? (NFLX closed at $612.09 on Dec. 31, 2021.)
• Calculate the ratio of the market value of equity to the book value of equity as of Dec. 31, 2021. Identify two primary reasons why you think the market value is different from the book value in the case of Netflix.
• If Netflix recognized all payments from customers as revenue upon receipt, what would Revenues have been in fiscal years 2020 and 2021?
• Why does ‘Stock-based compensation expense’ show up as a positive adjustment in the operating section of the Statement of Cash Flows for fiscal year 2021?
• On pages 26-27 of the Netflix 10-K, there is a calculation of Non-GAAP free cash flow. A generic definition of free cash flow that you might see is Cash flows from operation activities (CFO) – Cash outlflows from investing activities (CFI). For both fiscal years 2020 and 2021, discuss whether Netflix’s Non-GAAP calculation is better or worse than if they had simply used CFO – CFI.
• Why did ‘Interest and other income (expense)’ increase from an expense of $618,441 in FY20 to income of $411,214 in FY21?
• What was the average price paid for stock issued in fiscal year 2020 and 2021? How does this compare to the average market price of the stock during these two years? (Use the average 2020 Netflix daily closing stock price of $446.45 and average 2021 daily closing stock price of $558.04 in your calculations.)

Table of Contents
PART II
Item 5.Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol NFLX .
Holders
As of December 31, 2021, there were approximately 2,548 stockholders of record of our common stock, although there is a significantly larger number
of beneficial owners of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and we do not currently anticipate paying any cash dividends in the foreseeable
future.
Company Purchases of Equity Securities
In March 2021, the Company s Board of Directors authorized the repurchase of up to $5 billion of its common stock, with no expiration date. There were
no repurchases during the quarter ended December 31, 2021. As of December 31, 2021, $4.4 billion remains available for repurchases.
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Stock Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities and Exchange Commission, the following
information relating to the price performance of our common stock shall not be deemed filed with the Commission or soliciting material under the
Exchange Act and shall not be incorporated by reference into any such filings.
The following graph compares, for the five year period ended December 31, 2021, the total cumulative stockholder return on the Company s common
stock with the total cumulative return of the NASDAQ Composite Index, the S&P 500 Index and the RDG Internet Composite Index. Measurement points are
the last trading day of each of the Company s fiscal years ended December 31, 2016, December 31, 2017, December 31, 2018, December 31, 2019,
December 31, 2020 and December 31, 2021. Total cumulative stockholder return assumes $100 invested at the beginning of the period in the Company s
common stock, the stocks represented in the NASDAQ Composite Index, the stocks represented in the S&P 500 Index and the stocks represented in the RDG
Internet Composite Index, respectively, and reinvestment of any dividends. Historical stock price performance should not be relied upon as an indication of
future stock price performance.
Item 6.Reserved
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Item 7.Management s Discussion and Analysis of Financial Condition and Results of Operations
This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019
items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2020.
Results of Operations
The following represents our consolidated performance highlights:
2021
Financial Results:
Streaming revenues
DVD revenues
Total revenues
Global Streaming Memberships:
Paid net membership additions
Paid memberships at end of period
Average paying memberships
Average monthly revenue per paying membership
Operating income
Operating margin
$
As of/ Year Ended December 31,
2020
2019
(in thousands, except revenue per membership and percentages)
$
29,515,496
182,348
29,697,844
$
18,181
221,844
210,784
11.67
$
$
$
24,756,675
239,381
24,996,056
$
36,573
203,663
189,083
10.91
6,194,509
$
21 %
$
Change
2021 vs. 2020
$
19,859,230
297,217
20,156,447
19 %
(24) %
19 %
$
27,831
167,090
152,984
10.82
(50) %
9 %
11 %
7 %
2,604,254
13 %
35 %
4,585,289
$
18 %
Consolidated revenues for the year ended December 31, 2021 increased 19% as compared to the year ended December 31, 2020, due to the 11% growth
in average paying memberships and a 7% increase in average monthly revenue per paying membership. The increase in average monthly revenue per paying
membership resulted from our price changes and favorable fluctuations in foreign exchange rates. Paid net membership additions for the year ended
December 31, 2021 decreased 50% as compared to the year ended December 31, 2020. Our service continues to grow globally, with over 90% of the paid net
membership additions for the year ended December 31, 2021 coming from outside the United States and Canada (UCAN) region.
The increase in operating margin is due primarily to content amortization growing at a slower rate as compared to the 19% increase in revenues in part as
a result of delays in content releases due to the COVID-19 pandemic.
The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that
we may not be able to accurately predict. See Item 1A: “Risk Factors” section set forth in this Annual Report on Form 10-K for additional details. While most
of our productions have resumed, certain of our productions continue to experience disruption, as do the productions of our third-party content suppliers. Other
partners have similarly had their operations disrupted, including those partners that we use for our operations as well as development, production and
post-production of content. Production disruptions and new health and safety protocols and requirements can result in additional costs including additional pay
to cast and crew and use of PPE and testing. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions
that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our
employees, customers, partners and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business,
including the effects on our members, suppliers or vendors, or on our financial results.
Streaming Revenues
We derive revenues from monthly membership fees for services related to streaming content to our members. We offer a variety of streaming
membership plans, the price of which varies by country and the features of the plan. As of December 31,
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2021, pricing on our paid plans ranged from the U.S. dollar equivalent of $2 to $27 per month. We expect that from time to time the prices of our membership
plans in each country may change and we may test other plan and price variations.
The following tables summarize streaming revenue and other streaming membership information by region for the years ended December 31, 2021, 2020
and 2019.
United States and Canada (UCAN)
2021
Revenues
Paid net membership additions
Paid memberships at end of period (1)
Average paying memberships
Average monthly revenue per paying membership
Constant currency change (2)
$
$
As of/ Year Ended December 31,
2020
2019
(in thousands, except revenue per membership and percentages)
12,972,100
1,279
75,215
74,234
14.56
$
$
11,455,396
6,274
73,936
71,689
13.32
$
$
10,051,208
2,905
67,662
66,615
12.57
$
$
Change
2021 vs. 2020
1,516,704
(4,995)
1,279
2,545
1.24
13 %
(80)%
2%
4%
9%
9%
Europe, Middle East, and Africa (EMEA)
2021
Revenues
Paid net membership additions
Paid memberships at end of period (1)
Average paying memberships
Average monthly revenue per paying membership
Constant currency change (2)
$
$
As of/ Year Ended December 31,
2020
2019
(in thousands, except revenue per membership and percentages)
9,699,819
7,338
74,036
69,518
11.63
$
$
7,772,252
14,920
66,698
60,425
10.72
$
$
5,543,067
13,960
51,778
44,731
10.33
$
$
Change
2021 vs. 2020
1,927,567
(7,582)
7,338
9,093
0.91
25 %
(51) %
11 %
15 %
8%
4%
Latin America (LATAM)
2021
Revenues
Paid net membership additions
Paid memberships at end of period (1)
Average paying memberships
Average monthly revenue per paying membership
Constant currency change (2)
$
$
As of/ Year Ended December 31,
2020
2019
(in thousands, except revenue per membership and percentages)
3,576,976
2,424
39,961
38,573
7.73
Asia-Pacific (APAC)
21
$
$
3,156,727
6,120
37,537
35,297
7.45
$
$
2,795,434
5,340
31,417
28,391
8.21
$
$
Change
2021 vs. 2020
420,249
(3,696)
2,424
3,276
0.28
13 %
(60)%
6%
9%
4%
8%
Table of Contents
2021
Revenues
Paid net membership additions
Paid memberships at end of period (1)
Average paying memberships
Average monthly revenue per paying membership
Constant currency change (2)
$
$
As of/ Year Ended December 31,
2020
2019
(in thousands, except revenue per membership and percentages)
3,266,601
7,140
32,632
28,461
9.56
$
$
2,372,300
9,259
25,492
21,674
9.12
$
$
1,469,521
5,626
16,233
13,247
9.24
$
$
Change
2021 vs. 2020
894,301
(2,119)
7,140
6,787
0.44
38 %
(23)%
28 %
31 %
5%
2%
(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 certain other promotions that may be offered by the Company to new or 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, become 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.
(2) We believe constant currency information is useful in analyzing the underlying trends in average monthly revenue per paying membership. In order to
exclude the effect of foreign currency rate fluctuations on average monthly revenue per paying membership, we estimate current period revenue assuming
foreign exchange rates had remained constant with foreign exchange rates from each of the corresponding months of the prior-year period. For the year ended
December 31, 2021, our revenues would have been approximately $443 million lower had foreign currency exchange rates remained constant with those for
the year ended December 31, 2020.
Cost of Revenues
Amortization of content assets makes up the majority of cost of revenues. Expenses directly associated with the acquisition, licensing and production of
content (such as payroll and related personnel expenses, costs associated with obtaining rights to music included in our content, overall deals with talent,
miscellaneous production related costs and participations and residuals), streaming delivery costs and other operations costs make up the remainder of cost of
revenues. We have built our own global content delivery network ( Open Connect ) to help us efficiently stream a high volume of content to our members over
the internet. Delivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs,
such as cloud computing costs, associated with delivering content over the internet. Other operations costs include customer service and payment processing
fees, including those we pay to our integrated payment partners, as well as other costs directly incurred in making our content available to members.
2021
Cost of revenues
As a percentage of revenues
$
Year Ended December 31,
2020
2019
(in thousands, except percentages)
17,332,683
$
58 %
15,276,319
$
61 %
12,440,213
$
62 %
Change
2021 vs. 2020
2,056,364
13 %
The increase in cost of revenues for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to a $1,423
million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Other costs of revenues
increased $633 million, primarily due to the continued growth in our content production activities, coupled with an increase in expenses associated with
streaming delivery costs and payment processing fees driven by our growing member base. The decrease in cost of revenues as a percentage of revenues from
61% to 58% is primarily due to delays in content releases due to the COVID-19 pandemic, resulting in content amortization growing at a slower rate as
compared to the growth in revenue.
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing partners, including consumer electronics
(“CE”) manufacturers, MVPDs, mobile operators and ISPs. Advertising expenses include
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promotional activities such as digital and television advertising. Marketing expenses also include payroll and related expenses for personnel that support
marketing activities.
Year Ended December 31,
2020
2019
(in thousands, except percentages)
2021
Marketing
As a percentage of revenues
$
2,545,146
$
9%
2,228,362
$
9%
2,652,462
$
13 %
Change
2021 vs. 2020
316,784
14 %
The increase in marketing expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to a
$222 million increase in advertising expenses, partially offset by increased payments to our marketing partners. In addition, personnel-related costs increased
$116 million, primarily due to growth in average headcount to support the increase in our production activity and continued improvements in our streaming
service.
Technology and Development
Technology and development expenses consist primarily of payroll and related expenses for technology personnel responsible for making improvements
to our service offerings, including testing, maintaining and modifying our user interface, our recommendations, merchandising and infrastructure. Technology
and development expenses also include costs associated with general use computer hardware and software.
Year Ended December 31,
2020
2019
(in thousands, except percentages)
2021
Technology and development
As a percentage of revenues
$
2,273,885
$
8%
1,829,600
$
7%
1,545,149
$
8%
Change
2021 vs. 2020
444,285
24 %
The increase in technology and development expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was
primarily due to a $384 million increase in personnel-related costs, primarily due to growth in average headcount to support the increase in our production
activity and continued improvements in our streaming service.
General and Administrative
General and administrative expenses consist of payroll and related expenses for corporate personnel. General and administrative expenses also include
professional fees and other general corporate expenses.
Year Ended December 31,
2020
2019
(in thousands, except percentages)
2021
General and administrative
As a percentage of revenues
$
1,351,621
$
5%
1,076,486
$
4%
914,369
$
5%
Change
2021 vs. 2020
275,135
26 %
The increase in general and administrative expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was
primarily due to a $187 million increase in personnel-related costs, primarily due to growth in average headcount to support the increase in our production
activity and continued improvements in our streaming service. In addition, third-party expenses, including costs for contractors and consultants, increased
$66 million.
Interest Expense
Interest expense consists primarily of the interest associated with our outstanding debt obligations, including the amortization of debt issuance costs. See
Note 6 Debt in the accompanying notes to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K for further detail on our debt obligations.
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Table of Contents
Year Ended December 31,
2020
2019
(in thousands, except percentages)
2021
Interest expense
As a percentage of revenues
$
765,620
$
3%
767,499
$
3%
Change
2021 vs. 2020
626,023
$
3%
(1,879)
%
Interest expense for the year ended December 31, 2021 consisted primarily of $747 million of interest on our Notes. Interest expense for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 remained flat.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of foreign exchange gains and losses on foreign currency denominated balances and interest earned
on cash and cash equivalents.
2021
Interest and other income (expense)
As a percentage of revenues
$
Year Ended December 31,
2020
2019
(in thousands, except percentages)
411,214
$
1%
(618,441)
$
(2) %
84,000
Change
2021 vs. 2020
$
1,029,655
166 %
%
Interest and other income (expense) increased primarily due to foreign exchange gains of $403 million for the year ended December 31, 2021 as
compared to a loss of $660 million for the year ended December 31, 2020. The foreign exchange gain in the year ended December 31, 2021 was primarily
driven by the non-cash $431 million gain from the remeasurement of our Senior Notes denominated in euros, partially offset by the remeasurement of cash and
content liability positions in currencies other than the functional currencies. The foreign exchange loss in the year ended December 31, 2020 was primarily
driven by the non-cash $533 million loss from the remeasurement of our Senior Notes denominated in euros, coupled with the remeasurement of cash and
content liability positions in currencies other than the functional currencies.
Provision for Income Taxes
Year Ended December 31,
2020
2019
(in thousands, except percentages)
2021
Provision for income taxes
Effective tax rate
$
723,875
$
12 %
437,954
$
14 %
195,315
$
9%
Change
2021 vs. 2020
285,921
65 %
The decrease in our effective tax rate for the year ended December 31, 2021 as compared to the year ended December 31, 2020 is primarily due to the
establishment of a valuation allowance on the California R&D credit in the year ended December 31, 2020, offset primarily by a lower benefit on a percentage
basis from excess tax benefits related to stock-based compensation.
In 2021, the difference between our 12% effective tax rate and the Federal statutory rate of 21% was primarily due to the recognition of excess tax
benefits of stock-based compensation and the impact of international provisions of the Tax Cuts and Jobs Act.
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Liquidity and Capital Resources
Year Ended December 31,
2021
2020
(in thousands)
Cash, cash equivalents and restricted cash
Short-term and long-term debt
$
6,055,111
15,392,895
$
8,238,870
16,308,973
Change
2021 vs. 2020
$
(2,183,759)
(916,078)
(27)%
(6)%
Cash, cash equivalents and restricted cash decreased $2,184 million in the year ended December 31, 2021 primarily due to acquisitions, the repurchase of
stock, purchases of property and equipment and repayment of debt, partially offset by cash provided by operations.
Debt, net of debt issuance costs, decreased $916 million primarily due to the repayment upon maturity of the $500 million aggregate principal amount of
our 5.375% Senior Notes in February 2021, coupled with the remeasurement of our euro-denominated notes. The amount of principal and interest due in the
next twelve months is $1,408 million. The amount of principal and interest due beyond the next twelve months is $18,638 million. As of December 31, 2021,
no amounts had been borrowed under our $1 billion Revolving Credit Agreement. See Note 6 Debt in the accompanying notes to our consolidated financial
statements.
We anticipate that our future capital needs from the debt market will be more limited compared to prior years. Our ability to obtain this or any additional
financing that we may choose to, or need to, obtain will depend on, among other things, our development efforts, business plans, operating performance and the
condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. If we raise
additional funds through the issuance of equity or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common
stock, and our stockholders may experience dilution.
In March 2021, our Board of Directors authorized the repurchase of up to $5 billion of our common stock, with no expiration date. Stock repurchases
may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading plans intended
to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or other similar
purchase techniques and in such amounts as management deems appropriate. We are not obligated to repurchase any specific number of shares, and the timing
and actual number of shares repurchased will depend on a variety of factors, including our stock price, general economic, business and market conditions, and
alternative investment opportunities. We may discontinue any repurchases of our common stock at any time without prior notice. As of December 31, 2021, the
Company has repurchased 1,182,410 shares of common stock for an aggregate amount of $600 million. As of December 31, 2021, $4.4 billion remains
available for repurchases.
Our primary uses of cash include the acquisition, licensing and production of content, marketing programs, streaming delivery and personnel-related
costs. Cash payment terms for non-original content are in line with the amortization period. Investments in original content, and in particular content that we
produce and own, require more cash upfront relative to licensed content. For example, production costs are paid as the content is created, well in advance of
when the content is available on the service and amortized. We expect to continue to significantly increase our investments in global content, particularly in
original content. We currently anticipate that cash flows from operations, available funds and access to financing sources, including our revolving credit
facility, will continue to be sufficient to meet our cash needs for the next twelve months and beyond.
Our material cash requirements from known contractual and other obligations primarily relate to our content, debt and lease obligations. Expected timing
of those payments are as follows:
Total
Content obligations (1)
Debt (2)
Operating lease obligations (3)
Total
$
$
23,161,360
20,046,277
3,516,461
46,724,098
Next 12 Months
$
$
10,019,306
1,408,382
409,230
11,836,918
Beyond 12 Months
$
$
13,142,054
18,637,895
3,107,231
34,887,180
(1)As of December 31, 2021, content obligations were comprised of $4.3 billion included in “Current content liabilities” and $3.1 billion of “Non-current
content liabilities” on the Consolidated Balance Sheets and $15.8 billion of obligations that are not reflected on the Consolidated Balance Sheets as they
did not then meet the criteria for recognition.
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Content obligations include amounts related to the acquisition, licensing and production of content. An obligation for the production of content includes
non-cancelable commitments under creative talent and employment agreements and other production related commitments. An obligation for the
acquisition and licensing of content is incurred at the time we enter 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 these types of agreements. The contractual obligations table above
does not include any estimated obligation for the unknown future titles, payment for which could range from less than one year to more than five years.
However, these unknown obligations are expected to be significant and we believe could include approximately $1 billion to $4 billion over the next
three years, with the payments for the vast majority of such amounts expected to occur after the next twelve months. The foregoing range is based on
considerable management judgments and the actual amounts may differ. Once we know the title that we will receive and the license fees, we include the
amount in the contractual obligations table above.
(2)Debt obligations include our Notes consisting of principal and interest payments. See Note 6 Debt in the accompanying notes to our consolidated financial
statements for further details.
(3)See Note 5 Balance Sheet Components in the accompanying notes to our consolidated financial statements for further details regarding leases. As of
December 31, 2021, the Company has additional operating leases for real estate that have not yet commenced of $366 million which has been included
above. Total lease obligations as of December 31, 2021 increased $677 million from $2,839 million as of December 31, 2020 to $3,516 million as of
December 31, 2021 due to growth in facilities to support our growing headcount and growing number of original productions.
In addition, as of December 31, 2021, we had gross unrecognized tax benefits of $203 million, of which $39 million was classified in Other non-current
liabilities” in the Consolidated Balance Sheets. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax
benefits cannot be made.
Free Cash Flow
We define free cash flow as cash provided by (used in) operating activities less purchases of property and equipment and change in other assets. We
believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt
obligations, make strategic acquisitions and investments and for certain other activities like share repurchases. Free cash flow is considered a non-GAAP
financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, cash flow provided by (used in) operating
activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.
In assessing liquidity in relation to our results of operations, we compare free cash flow to net income, noting that the major recurring differences are
excess content payments over amortization, non-cash stock-based compensation expense, non-cash remeasurement gain/loss on our euro-denominated debt,
and other working capital differences. Working capital differences include deferred revenue, excess property and equipment purchases over depreciation, taxes
and semi-annual interest payments on our outstanding debt. Our receivables from members generally settle quickly.
2021
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Non-GAAP reconciliation of free cash flow:
Net cash provided by (used in) operating activities
Purchases of property and equipment
Change in other assets
Free cash flow
$
$
Year Ended December 31,
2020
(in thousands)
392,610
(1,339,853)
(1,149,776)
392,610
(524,585)
(26,919)
(158,894)
$
$
2,427,077
(505,354)
1,237,311
2,427,077
(497,923)
(7,431)
1,921,723
Change
2021 vs. 2020
2019
$
$
(2,887,322)
(387,064)
4,505,662
(2,887,322)
(253,035)
(134,029)
(3,274,386)
$
$
(2,034,467)
(834,499)
(2,387,087)
(84) %
(165) %
(193) %
(2,034,467)
(26,662)
(19,488)
(2,080,617)
(84) %
(5) %
(262) %
(108) %
Net cash provided by operating activities decreased $2,034 million from the year ended December 31, 2020 to $393 million for the year ended
December 31, 2021 primarily driven by an increase in investments in content that require more
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upfront cash payments, partially offset by a $4,702 million or 19% increase in revenues. The payments for content assets increased $4,933 million, from
$12,537 million to $17,469 million, or 39%, as compared to the increase in the amortization of content assets of $1,423 million, from $10,807 million to
$12,230 million, or 13%. The increase in payments for content assets was primarily driven by delays in productions resulting from the pandemic that impacted
the prior year, which resulted in the timing of certain production payments being shifted into the current year. In addition, we had increased payments
associated with higher operating expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our
international expansion.
Net cash used in investing activities increased $834 million, primarily due to acquisitions.
Net cash provided by (used in) financing activities decreased $2,387 million primarily due to no debt issuances in the year ended December 31, 2021 as
compared to proceeds from the issuance of debt of $1,002 million, net of $8 million issuance costs in the year ended December 31, 2020, coupled with the
repurchases of common stock for an aggregate amount of $600 million in the year ended December 31, 2021 and repayment upon maturity of the $500 million
aggregate principal amount of our 5.375% Senior Notes in February 2021.
Free cash flow was $5,275 million lower than net income for the year ended December 31, 2021 primarily due to $5,239 million of cash payments for
content assets over amortization expense, $431 million of non-cash remeasurement gain on our euro-denominated debt and $8 million other non-favorable
working capital differences, partially offset by $403 million of non-cash stock-based compensation expenses.
Free cash flow was $840 million lower than net income for the year ended December 31, 2020 primarily due to $1,730 million of cash payments for
content assets over amortization expense and $308 million in other non-favorable working capital differences, partially offset by $533 million of non-cash
remeasurement loss on our euro-denominated debt, $415 million of non-cash stock-based compensation expenses, and a $250 million non-cash valuation
allowance on the California R&D credit.
Indemnifications
The information set forth under Note 8 Guarantees – Indemnification Obligations in the accompanying notes to our consolidated financial statements
included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K is incorporated herein by reference.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and Exchange Commission
(“SEC”) has defined a company s critical accounting policies as the ones that are most important to the portrayal of a company s financial condition and results
of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates.
Content
We acquire, license and produce content, including original programming, in order to offer our members unlimited viewing of video entertainment. The
content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more
upfront cash payments relative to the amortization expense. Payments for content, including additions to content assets and the changes in related liabilities, are
classified within “Net cash provided by (used in) operating activities” on the Consolidated Statements of Cash Flows.
We recognize content assets (licensed and produced) as “Content assets, net” on the Consolidated Balance Sheets. For licensed content, we capitalize the
fee per title and record a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known and the title is
accepted and available for streaming. For produced content, we capitalize costs associated with the production, including development cost, direct costs and
production overhead. Participations and residuals are expensed in line with the amortization of production costs.
Based on factors including historical and estimated viewing patterns, we amortize the content assets (licensed and produced) in Cost of revenues on the
Consolidated Statements of Operations over the shorter of each title’s contractual window of availability or estimated period of use or ten years, beginning with
the month of first availability. The amortization is on an accelerated basis, as we typically expect more upfront viewing, and film amortization is more
accelerated than TV
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Table of Contents
series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized within four years after its month of first
availability. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable
management judgment.
Our business model is subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and produced) are
predominantly monetized as a group and therefore are reviewed at a group level when an event or change in circumstances indicates a change in the expected
usefulness of the content or that the fair value may be less than unamortized cost. To date, we have not identified any such event or changes in circumstances.
If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost or fair value. In addition,
unamortized costs for assets that have been, or are expected to be, abandoned are written off.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method.
Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.
Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of
any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past
operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in
determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business.
Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that it is more likely than not
that most of the deferred tax assets recorded on our Consolidated Balance Sheets will ultimately be realized. We record a valuation allowance to reduce our
deferred tax assets to the net amount that we believe is more likely than not to be realized. As of December 31, 2021 the valuation allowance of $318 million
was related to the California research and development credits and certain foreign tax attributes that we do not expect to realize.
We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is
more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon settlement. At December 31, 2021, our estimated gross unrecognized tax benefits were $203 million of which $136 million, if recognized, would
favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions
may change and the actual tax benefits may differ significantly from the estimates.
See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes.
Recent Accounting Pronouncements
The information set forth under Note 1 to the consolidated financial statements under the caption Basis of Presentation and Summary of Significant
Accounting Policies is incorporated herein by reference.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to interest rate changes and the corresponding changes in the market values of our debt and foreign currency
fluctuations.
Interest Rate Risk
At December 31, 2021, our cash equivalents were generally invested in money market funds. Interest paid on such funds fluctuates with the prevailing
interest rate.
As of December 31, 2021, we had $15.5 billion of debt, consisting of fixed rate unsecured debt in fifteen tranches due between 2022 and 2030. Refer to
Note 6 to the consolidated financial statements for details about all issuances. The fair value of our debt will fluctuate with movements of interest rates,
increasing in periods of declining rates of interest and declining in
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periods of increasing rates of interest. The fair value of our debt will also fluctuate based on changes in foreign currency rates, as discussed below.
Foreign Currency Risk
Revenues denominated in currencies other than the U.S. dollar account for 57% of the consolidated amount for the year ended December 31, 2021. We
therefore have foreign currency risk related to these currencies, which are primarily the euro, the British pound, the Brazilian real, the Canadian dollar, the
Mexican peso, the Australian dollar, and the Japanese yen.
Accordingly, changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our revenue
and operating income as expressed in U.S. dollars. For the year ended December 31, 2021, our revenues would have been approximately $443 million lower
had foreign currency exchange rates remained constant with those for the year ended December 31, 2020.
We have also experienced and will continue to experience fluctuations in our net income as a result of gains (losses) on the settlement and the
remeasurement of monetary assets and liabilities denominated in currencies that are not the functional currency. In the year ended December 31, 2021, we
recognized a $403 million foreign exchange gain primarily due to the non-cash remeasurement of our Senior Notes denominated in euros, partially offset by
the remeasurement of cash and content liability positions denominated in currencies other than functional currencies.
In addition, the effect of exchange rate changes on cash and cash equivalents in the year ended December 31, 2021 was an decrease of $87 million.
We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures. The volatility of exchange rates depends on many
factors that we cannot forecast with reliable accuracy. Our continued international expansion increases our exposure to exchange rate fluctuations and as a
result such fluctuations could have a significant impact on our future results of operations.
Item 8.Financial Statements and Supplementary Data
The consolidated financial statements and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K are included
immediately following Part IV hereof and incorporated by reference herein.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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NETFLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
2021
Revenues
Cost of revenues
Marketing
Technology and development
General and administrative
Operating income
Other income (expense):
Interest expense
Interest and other income (expense)
Income before income taxes
Provision for income taxes
Net income
$
2020
29,697,844
17,332,683
2,545,146
2,273,885
1,351,621
6,194,509
$
(765,620)
411,214
5,840,103
(723,875)
5,116,228
Earnings per share:
Basic
$
Diluted
$
Weighted-average common shares outstanding:
Basic
Diluted
$
2019
24,996,056
15,276,319
2,228,362
1,829,600
1,076,486
4,585,289
$
20,156,447
12,440,213
2,652,462
1,545,149
914,369
2,604,254
$
(767,499)
(618,441)
3,199,349
(437,954)
2,761,395
$
(626,023)
84,000
2,062,231
(195,315)
1,866,916
11.55
$
6.26
$
4.26
11.24
$
6.08
$
4.13
443,155
440,922
437,799
455,372
454,208
451,765
See accompanying notes to consolidated financial statements.
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NETFLIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
2021
Net income
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive income
Year ended December 31,
2020
2019
$
5,116,228
$
2,761,395
$
1,866,916
$
(84,893)
5,031,335
$
67,919
2,829,314
$
(3,939)
1,862,977
See accompanying notes to consolidated financial statements.
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NETFLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2021
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Additions to content assets
Change in content liabilities
Amortization of content assets
Depreciation and amortization of property, equipment and intangibles
Stock-based compensation expense
Foreign currency remeasurement loss (gain) on debt
Other non-cash items
Deferred income taxes
Changes in operating assets and liabilities:
Other current assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Other non-current assets and liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Change in other assets
Acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Debt issuance costs
Repayments of debt
Proceeds from issuance of common stock
Repurchases of common stock
Taxes paid related to net share settlement of equity awards
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
Supplemental disclosure:
Income taxes paid
Interest paid
$
$
$
5,116,228
2020
$
2,761,395
2019
$
1,866,916
(17,702,202)
232,898
12,230,367
208,412
403,220
(430,661)
376,777
199,548
(11,779,284)
(757,433)
10,806,912
115,710
415,180
533,278
293,126
70,066
(13,916,683)
(694,011)
9,216,247
103,579
405,376
(45,576)
228,230
(94,443)
(369,681)
145,115
180,338
91,350
(289,099)
392,610
(187,623)
(41,605)
198,183
193,247
(194,075)
2,427,077
(252,113)
96,063
157,778
163,846
(122,531)
(2,887,322)
(524,585)
(26,919)
(788,349)
(1,339,853)
(497,923)
(7,431)
(253,035)
(134,029)
(505,354)
(387,064)
1,009,464
(7,559)
4,469,306
(36,134)
235,406
72,490
1,237,311
36,050
3,195,084
5,043,786
8,238,870
4,505,662
469
1,231,745
3,812,041
5,043,786
(500,000)
174,414
(600,022)
(224,168)
(1,149,776)
(86,740)
(2,183,759)
8,238,870
6,055,111
509,265
763,432
See accompanying notes to consolidated financial statements.
41
$
$
291,582
762,904
$
$
400,658
599,132
Table of Contents
NETFLIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
As of December 31,
2021
Assets
Current assets:
Cash and cash equivalents
Other current assets
Total current assets
Content assets, net
Property and equipment, net
Other non-current assets
Total assets
$
$
Liabilities and Stockholders Equity
Current liabilities:
Current content liabilities
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Short-term debt
Total current liabilities
Non-current content liabilities
Long-term debt
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 7)
Stockholders equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2021 and December 31,
2020; no shares issued and outstanding at December 31, 2021 and December 31, 2020
Common stock, 0.001 par value; 4,990,000,000 shares authorized at December 31, 2021 and
December 31, 2020; 443,963,107 and 442,895,261 issued and outstanding at December 31, 2021 and
December 31, 2020, respectively
Treasury stock at cost (1,564,478 shares at December 31, 2021)
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders equity
Total liabilities and stockholders equity
See accompanying notes to consolidated financial statements.
42
$
$
2020
6,027,804
2,042,021
8,069,825
30,919,539
1,323,453
4,271,846
44,584,663
$
4,292,967
837,483
1,449,351
1,209,342
699,823
8,488,966
3,094,213
14,693,072
2,459,164
28,735,415
$
4,024,561
(824,190)
(40,495)
12,689,372
15,849,248
44,584,663
$
8,205,550
1,556,030
9,761,580
25,383,950
960,183
3,174,646
39,280,359
4,429,536
656,183
1,102,196
1,117,992
499,878
7,805,785
2,618,084
15,809,095
1,982,155
28,215,119
3,447,698
$
44,398
7,573,144
11,065,240
39,280,359
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NETFLIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
Common Stock and Additional
Paid-in Capital
Shares
Amount
Balances as of December 31, 2018
Net income
Other comprehensive loss
Issuance of common stock upon exercise
of options
Stock-based compensation expense
Adoption of ASU 2016-02, Leases
(Topic 842)
Balances as of December 31, 2019
Net income
Other comprehensive income
Issuance of common stock upon exercise
of options
Stock-based compensation expense
Balances as of December 31, 2020
Net income
Other comprehensive loss
Issuance of common stock upon exercise
of options
Repurchases of common stock
Shares withheld related to net share
settlement
Stock-based compensation expense
Balances as of December 31, 2021
436,598,597
$
2,315,988
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
$
$
(19,582)
Total
Stockholders
Equity
Retained
Earnings
$
2,942,359
1,866,916
$
(3,939)
2,208,052
438,806,649
72,565
405,376
$
2,793,929
72,565
405,376
$
$
(23,521)
$
2,474
4,811,749
2,761,395
$
67,919
4,088,612
442,895,261
$
238,589
415,180
3,447,698
$
$
44,398
$
7,573,144
5,116,228
$
(84,893)
2,632,324
(1,182,410)
173,643
(382,068)
443,963,107
(224,168)
$
$
(824,190)
2,474
7,582,157
2,761,395
67,919
238,589
415,180
11,065,240
5,116,228
(84,893)
173,643
(600,022)
(600,022)
403,220
4,024,561
5,238,765
1,866,916
(3,939)
$
(40,495)
See accompanying notes to consolidated financial statements.
43
$
12,689,372
$
(224,168)
403,220
15,849,248
Table of Contents
NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Organization and Summary of Significant Accounting Policies
Description of Business
Netflix, Inc. (the Company ) was incorporated on August 29, 1997 and began operations on April 14, 1998. The Company is one of the world s leading
entertainment services with approximately 222 million paid memberships in over 190 countries enjoying TV series, documentaries, feature films and mobile
games across a wide variety of genres and languages. Members can engage as much as they want, anytime, anywhere, on any internet-connected screen.
Members can play, pause and resume watching, all without commercials. Additionally, the Company continues to offer its DVD-by-mail service in the United
States (“U.S.”).
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. 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 an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.
Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) 2019-12, Simplifying the
Accounting for Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions for performing intraperiod tax allocations, recognizing deferred taxes for
investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a
step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. The Company adopted ASU 2019-12 in the first
quarter of 2021 and the adoption had no material impact to the Company s consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from
Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance
with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is
permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08, it does not expect ASU 2021-08 to
have a material effect, if any, on its consolidated financial statements.
Cash Equivalents
The Company considers investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents. The Company also
classifies amounts in transit from payment processors for customer credit card and debit card transactions as cash equivalents.
Content
The Company acquires, licenses and produces content, including original programming, in order to offer members unlimited viewing of video
entertainment. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of
content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to content assets and the changes in
related liabilities, are classified within “Net cash provided by (used in) operating activities” on the Consolidated Statements of Cash Flows.
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The Company recognizes content assets (licensed and produced) as Content assets, net on the Consolidated Balance Sheets. For licensed content, the
Company capitalizes the fee per title and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the
title is known and the title is accepted and available for streaming. For produced content, the Company capitalizes costs associated with the production,
including development costs, direct costs and production overhead. Participations and residuals are expensed in line with the amortization of production costs.
Based on factors including historical and estimated viewing patterns, the Company amortizes the content assets (licensed and produced) in Cost of
revenues on the Consolidated Statements of Operations over the shorter of each title’s contractual window of availability or estimated period of use or ten
years, beginning with the month of first availability. The amortization is on an accelerated basis, as the Company typically expects more upfront viewing, and
film amortization is more accelerated than TV series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized
within four years after its month of first availability. The Company reviews factors impacting the amortization of the content assets on an ongoing basis. The
Company’s estimates related to these factors require considerable management judgment.
The Company’s business model is subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and
produced) are predominantly monetized as a group and therefore are reviewed in aggregate at a group level when an event or change in circumstances indicates
a change in the expected usefulness of the content or that the fair value may be less than unamortized cost. To date, the Company has not identified any such
event or changes in circumstances. If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost or
fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off.
Acquisitions
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the
acquisition date. In addition, uncertain tax positions, tax-related valuation allowances and pre-acquisition contingencies are initially recorded in connection
with a business combination as of the acquisition date. Intangible assets are amortized over their estimated useful lives.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the shorter of the
estimated useful lives of the respective assets, generally up to 30 years, or the expected lease term for leasehold improvements, if applicable.
Trade Receivables
Trade receivables consist primarily of amounts related to members and payment partners that collect membership fees on the Company’s behalf. The
Company evaluates the need for an allowance for credit losses based on historical collection trends, the financial condition of its payment partners, and external
market factors. The Company’s allowance for credit losses was not material as of December 31, 2021 and December 31, 2020.
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to the Company s partners, including consumer electronics
(“CE”) manufacturers, multichannel video programming distributors (“MVPDs”), mobile operators and internet service providers (“ISPs”). Advertising
expenses include promotional activities such as digital and television advertising. Advertising costs are expensed as incurred. Advertising expenses were
$1,669 million, $1,447 million and $1,879 million for the years ended December 31, 2021, 2020 and 2019, respectively. Marketing expenses also include
payroll and related expenses for personnel that support the Company’s marketing activities.
Income Taxes
The Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability
method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.
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The Company did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. The Company may recognize a
tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. See Note
10 Income Taxes to the consolidated financial statements for further information regarding income taxes.
Foreign Currency
The functional currency for the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary operates. The
Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of
each period. Revenues and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from
these translations are recognized in cumulative translation adjustment included in “Accumulated other comprehensive income (loss)” in Stockholders equity
on the Consolidated Balance Sheets.
The Company remeasures monetary assets and liabilities that are not denominated in the functional currency at exchange rates in effect at the end of each
period. Gains and losses from these remeasurements are recognized in interest and other income (expense). Foreign currency transactions resulted in a gain of
$403 million, a loss of $660 million, and a gain of $7 million for the years ended December 31, 2021, 2020 and 2019, respectively. These gains and losses were
primarily due to the non-cash remeasurement of our Senior Notes denominated in euros and the remeasurement of cash and content liability positions
denominated in currencies other than functional currencies.
Stock-Based Compensation
The Company grants fully vested non-qualified stock options to its employees on a monthly basis. As a result of immediate vesting, stock-based
compensation expense is fully recognized on the grant date, and no estimate is required for post-vesting option forfeitures. See Note 9 Stockholders’ Equity to
the consolidated financial statements for further information regarding stock-based compensation.
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 CE manufacturers, MVPDs, mobile
operators and 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. However, if there is no distinct service provided in exchange for the payments made to the partners or if 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 revenues, paid net membership additions, and ending paid memberships by region for the years December 31,
2021, 2020 and 2019, respectively:
United States and Canada (UCAN)
As of/ Year Ended December 31,
2020
(in thousands)
2021
Revenues
Paid net membership additions
Paid memberships at end of period
$
12,972,100
1,279
75,215
46
$
11,455,396
6,274
73,936
2019
$
10,051,208
2,905
67,662
Table of Contents
Europe, Middle East, and Africa (EMEA)
As of/ Year Ended December 31,
2020
(in thousands)
2021
Revenues
Paid net membership additions
Paid memberships at end of period
$
9,699,819
$
7,338
74,036
7,772,252
2019
$
5,543,067
14,920
66,698
13,960
51,778
Latin America (LATAM)
As of/ Year Ended December 31,
2020
(in thousands)
2021
Revenues
Paid net membership additions
Paid memberships at end of period
$
3,576,976
$
2,424
39,961
3,156,727
2019
$
2,795,434
6,120
37,537
5,340
31,417
Asia-Pacific (APAC)
As of/ Year Ended December 31,
2020
(in thousands)
2021
Revenues
Paid net membership additions
Paid memberships at end of period
$
3,266,601
7,140
32,632
$
2,372,300
9,259
25,492
2019
$
1,469,521
5,626
16,233
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 certain other promotions that may be offered by the Company to new or 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, become 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 $12.1 billion, $10.8 billion and $9.5 billion for the years ended
December 31, 2021, 2020 and 2019, respectively. DVD revenues were $0.2 billion, $0.2 billion, and $0.3 billion for the years ended December 31, 2021, 2020
and 2019, respectively.
Deferred revenue consists of membership fees billed that have not been recognized, as well as gift and other prepaid memberships that have not been
fully redeemed. As of December 31, 2021, total deferred revenue was $1,209 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 $91 million
increase in deferred revenue as compared to the balance of $1,118 million for the year ended December 31, 2020, is a result of the increase in membership fees
billed due to increased memberships and average monthly revenue per paying member.
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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:
2021
Basic earnings per share:
Net income
Shares used in computation:
Weighted-average common shares outstanding
Basic earnings per share
Diluted earnings per share:
Net income
Shares used in computation:
Weighted-average common shares outstanding
Employee stock options
Weighted-average number of shares
Diluted earnings per share
Year ended December 31,
2020
(in thousands, except per share data)
2019
$
5,116,228
$
2,761,395
$
1,866,916
$
443,155
11.55
$
440,922
6.26
$
437,799
4.26
$
5,116,228
$
2,761,395
$
1,866,916
$
443,155
12,217
455,372
11.24
$
440,922
13,286
454,208
6.08
$
437,799
13,966
451,765
4.13
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:
Year ended December 31,
2020
(in thousands)
2021
Employee stock options
348
2019
484
1,588
4.Cash, Cash Equivalents and Restricted Cash
The following tables summarize the Company’s cash, cash equivalents and restricted cash as of December 31, 2021 and 2020:
As of December 31, 2021
Other Current
Non-current
Assets
Assets
(in thousands)
Cash and cash
equivalents
Cash
Level 1 securities:
Money market funds
48
Total
$
4,103,613
$
3,189
$
23,972
$
4,130,774
$
1,924,191
6,027,804
$
3,189
$
146
24,118
$
1,924,337
6,055,111
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As of December 31, 2020
Other Current
Non-current
Assets
Assets
(in thousands)
Cash and cash
equivalents
Cash
Level 1 securities:
Money market funds
Level 2 securities:
Foreign Time Deposits
$
3,331,860
$
1,783
$
4,573,690
$
300,000
8,205,550
Total
31,284
$
253
$
1,783
$
3,364,927
4,573,943
31,537
$
300,000
8,238,870
Other current assets include restricted cash for deposits related to self insurance. Non-current assets include restricted cash related to letter of credit
agreements. Foreign time deposits of $300 million, classified as Level 2 securities, were included in Cash and cash equivalents on the Company’s Balance
Sheet as of December 31, 2020. 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 Debt to the consolidated financial statements for further information regarding the fair value of the Company s senior notes.
5.Balance Sheet Components
Content Assets, Net
Content assets consisted of the following:
As of December 31,
2021
2020
(in thousands)
Licensed content, net
Produced content, net
Released, less amortization
In production
In development and pre-production
Content assets, net
$
13,799,221
$
6,877,743
9,235,975
1,006,600
17,120,318
$
30,919,539
13,747,607
5,809,681
4,827,455
999,207
11,636,343
$
25,383,950
As of December 31, 2021, approximately $6,008 million, $3,149 million, and $1,944 million of the $13,799 million unamortized cost of the licensed
content is expected to be amortized in each of the next three years. As of December 31, 2021, approximately $2,736 million, $1,884 million, and $1,138
million of the $6,878 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 December 31, 2021, the amount of accrued participations and residuals was not material.
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The following table represents the amortization of content assets:
Year ended December 31,
2021
Licensed content
Produced content
Total
$
2020
(in thousands)
8,055,811
4,174,556
12,230,367
$
$
2019
7,544,631
3,262,281
10,806,912
$
$
$
7,242,799
1,973,448
9,216,247
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
As of December 31,
2021
Estimated Useful Lives (in Years)
2020
(in thousands)
Land
Buildings
Leasehold improvements
Furniture and fixtures
Information technology
Corporate aircraft
Machinery and equipment
Capital work-in-progress
Property and equipment, gross
Less: Accumulated depreciation
Property and equipment, net
$
$
82,381
48,123
863,342
139,809
380,452
110,978
32,426
282,248
1,939,759
(616,306)
1,323,453
$
50,700
42,717
524,537
110,185
283,014
110,629
34,633
298,558
1,454,973
(494,790)
960,183
$
30 years
Over life of lease
3 years
3 years
8 years
3-5 years
Leases
The Company has entered into operating leases primarily for real estate. These leases generally have terms which range from 1 year to 15 years, and often
include one or more options to renew. These renewal terms can extend the lease term from 1 year to 20 years, and are included in the lease term when it is
reasonably certain that the Company will exercise the option. 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. Operating lease
right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company has
entered into various short-term operating leases 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. The Company has certain contracts for
real estate which may contain lease and non-lease components which it has elected to treat as a single lease component.
The components of lease costs for the years ended December 31, 2021, 2020 and 2019 were as follows:
Year ended December 31,
2021
Operating lease cost
Short-term lease cost
Total lease cost
$
$
50
2020
(in thousands)
389,805
152,765
542,570
$
$
323,905
116,606
440,511
2019
$
$
218,142
229,747
447,889
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Information related to the Company’s operating right-of-use assets and related operating lease liabilities were as follows:
2021
Cash paid for operating lease liabilities
$
Right-of-use assets obtained in exchange for new operating lease obligations (1)
Year ended December 31,
2020
(in thousands)
349,586
764,142
$
259,559
729,942
2019
$
192,084
1,672,462
(1) Balance as of December 31, 2019 includes $743 million for operating leases existing on January 1, 2019.
As of December 31,
2021
2020
(in thousands, except lease term and discount rate)
Operating lease right-of-use assets, net
Current operating lease liabilities
Non-current operating lease liabilities
Total operating lease liabilities
2,446,573
315,189
2,408,486
2,723,675
Weighted-average remaining lease term
Weighted-average discount rate
2,037,726
256,222
1,945,631
2,201,853
9.2 years
3.1
8.9 years
3.6
Total operating lease liabilities
395,932
378,774
358,442
340,028
335,151
1,332,662
3,140,989
(417,314)
2,723,675
Maturities of operating lease liabilities as of December 31, 2021 were as follows (in thousands):
Due in 12 month period ended December 31,
2022
2023
2024
2025
2026
Thereafter
Less imputed interest
The Company has additional operating leases for real estate of $366 million which have not commenced as of December 31, 2021, and as such, have not
been recognized on the Company’s Consolidated Balance Sheets. These operating leases are expected to commence in 2022 and 2023 with lease terms between
5 year and 14 years.
Other Current Assets
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Table of Contents
Other current assets consisted of the following:
As of
December 31,
December 31,
2021
2020
(in thousands)
Trade receivables
Prepaid expenses
Other
Total other current assets
$
$
52
804,320
323,818
913,883
2,042,021
$
$
610,819
203,042
742,169
1,556,030
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6.Debt
As of December 31, 2021, the Company had aggregate outstanding notes of $15,393 million, net of $92 million of issuance costs, with varying maturities
(the “Notes”). Of the outstanding balance, $700 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of
December 31, 2020, the Company had aggregate outstanding long-term notes of $16,309 million, net of $107 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 5,170 million) and is remeasured into U.S. dollars at each balance sheet date (with remeasurement gain
totaling $431 million for the year ended December 31, 2021).
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
December 31, 2021 and December 31, 2020:
Principal Amount at Par
December 31,
December 31,
2021
2020
(in millions)
5.375% Senior Notes
5.500% Senior Notes
5.750% Senior Notes
5.875% Senior Notes
3.000% Senior Notes (1)
3.625% Senior Notes
4.375% Senior Notes
3.625% Senior Notes (1)
4.875% Senior Notes
5.875% Senior Notes
4.625% Senior Notes (1)
6.375% Senior Notes
3.875% Senior Notes (1)
5.375% Senior Notes
3.625% Senior Notes (1)
4.875% Senior Notes
$
$
$
700
400
800
535
500
1,000
1,480
1,600
1,900
1,252
800
1,366
900
1,252
1,000
15,485
$
500
700
400
800
574
500
1,000
1,588
1,600
1,900
1,344
800
1,466
900
1,344
1,000
16,416
Issuance Date
Maturity
February 2013
February 2015
February 2014
February 2015
April 2020
April 2020
October 2016
May 2017
October 2017
April 2018
October 2018
October 2018
April 2019
April 2019
October 2019
October 2019
February 2021
February 2022
March 2024
February 2025
June 2025
June 2025
November 2026
May 2027
April 2028
November 2028
May 2029
May 2029
November 2029
November 2029
June 2030
June 2030
Level 2 Fair Value as of
December 31,
December 31,
2021
2020
(in millions)
$
$
$
704
437
899
581
529
1,111
1,702
1,829
2,293
1,565
999
1,651
1,068
1,493
1,169
18,030
$
502
735
449
921
616
535
1,110
1,776
1,807
2,280
1,630
995
1,700
1,061
1,533
1,155
18,805
(1) The following Senior Notes have a principal amount denominated in euro: 3.000% Senior Notes for 470 million, 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.
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 December 31, 2021 and December 31, 2020, the Company was in compliance with all related covenants.
Revolving Credit Facility
On June 17, 2021, the Company amended its unsecured revolving credit facility (“Revolving Credit Agreement”) to, among other things, extend the
maturity date from March 29, 2024 to June 17, 2026 and to increase the size of the facility from
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Table of Contents
$750 million to $1 billion. Revolving loans may be borrowed, repaid and reborrowed until June 17, 2026, 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 December 31, 2021, 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 Adjusted LIBO Rate to continue to make rate submissions, and that publication of the Adjusted
LIBO Rate based upon U.S. Dollars is expected to cease on June 30, 2023. The Revolving Credit Agreement contains customary provisions for the
replacement of the Adjusted LIBO Rate with an alternate benchmark rate, including a rate based on the secured overnight financing rate published by the
Federal Reserve Bank of New York, as the Adjusted LIBO Rate is phased out in the lending market. The Company does not anticipate that the replacement of
the Adjusted LIBO Rate with such alternative benchmark rate, as provided in the Revolving Credit Agreement, 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 December 31, 2021 and December 31, 2020, the Company was in compliance with all related
covenants.
7.Commitments and Contingencies
Content
At December 31, 2021, the Company had $23.2 billion of obligations comprised of $4.3 billion included in “Current content liabilities” and $3.1 billion
of “Non-current content liabilities” on the Consolidated Balance Sheets and $15.8 billion of obligations that are not reflected on the Consolidated Balance
Sheets as they did not yet meet the criteria for asset recognition.
At December 31, 2020, the Company had $19.2 billion of obligations comprised of $4.4 billion included in “Current content liabilities” and $2.6 billion
of “Non-current content liabilities” on the Consolidated Balance Sheets and $12.2 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 December 31,
2021
2020
(in thousands)
Less than one year
Due after one year and through 3 years
Due after 3 years and through 5 years
Due after 5 years
Total content obligations
$
$
10,019,306
9,238,315
3,238,977
664,762
23,161,360
$
$
8,980,868
7,819,563
1,973,091
445,308
19,218,830
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
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Table of Contents
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.
8.Guarantees
Indemnification Obligations
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 guarantees.
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9. Stockholders Equity
Voting Rights
The holders of each share of common stock shall be entitled to one vote per share on all matters to be voted upon by the Company s stockholders.
Stock Option Plan
On June 4, 2020, the Company’s stockholders approved the 2020 Stock Plan, which was adopted by the Company’s Board of Directors on March 4, 2020
subject to stockholder approval. The 2020 Stock Plan is the successor to the 2011 Stock Plan. The 2020 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. The 2020 Stock Plan authorized 17,500,000 new shares to be available for award grants. As of the date the 2020 Stock Plan was
adopted by the Company’s Board of Directors, 5,530,106 shares were available to be granted under the 2011 Stock Plan. These shares are available for award
grants under the 2020 Stock Plan.
A summary of the activities related to the Company s stock option plans is as follows:
Shares Available
for Grant
Balances as of December 31, 2018
Granted
Exercised
Expired
Balances as of December 31, 2019
New Shares Authorized
Granted
Exercised
Expired
Balances as of December 31, 2020
Granted
Exercised
Expired
Balances as of December 31, 2021
Vested and exercisable at December 31, 2021
8,699,941
(2,588,380)
6,111,561
17,500,000
(1,909,476)
21,702,085
(1,556,725)
20,145,360
Options Outstanding
Weighted- Average
Number of
Exercise Price
Shares
(per Share)
20,479,278
2,588,380
(2,208,052)
(280)
20,859,326
1,909,476
(4,088,612)
(3,380)
18,676,810
1,556,725
(2,632,324)
(5,360)
17,595,851
17,595,851
$
$
$
$
$
89.61
320.66
32.88
6.74
124.28
432.34
58.35
27.54
170.23
554.11
65.97
34.63
219.83
219.83
The aggregate intrinsic value of the Company’s outstanding stock options as of December 31, 2021 was $6,744 million and represents the total pretax
intrinsic value (the difference between the Company s closing stock price on the last trading day of 2021 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 2021. This
amount changes based on the fair market value of the Company s common stock. Total intrinsic value of options exercised for the years ended December 31,
2021, 2020 and 2019 was $1,363 million, $1,596 million and $666 million, respectively. The weighted-average remaining contractual term of the Company’s
outstanding stock options as of December 31, 2021 included in the table above was 5.37 years.
Cash received from option exercises for the years ended December 31, 2021, 2020 and 2019 was $174 million, $235 million and $72 million,
respectively. The Company records stock option exercises based on trade date.
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Table of Contents
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:
Year Ended December 31,
2020
2021
Dividend yield
Expected volatility
Risk-free interest rate
Suboptimal exercise factor
Valuation data:
Weighted-average fair value (per share)
Total stock-based compensation expense (in thousands)
Total income tax impact on provision (in thousands)
%
34% – 41%
1.08% – 1.62%
3.81 – 3.98
$
2019
%
37% – 45%
0.67% – 1.71%
3.34 – 3.67
259.01
$
403,220
217.42
%
37% – 41%
1.74% – 2.74%
3.07 – 3.23
$
415,180
91,718
89,642
156.60
405,376
90,856
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.
Stock Repurchases
In March 2021, the Company s Board of Directors authorized the repurchase of up to $5 billion of its common stock, with no expiration date. Stock
repurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading
plans intended to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or
other similar purchase techniques and in such amounts as management deems appropriate. The Company is not obligated to repurchase any specific number of
shares, and the timing and actual number of shares repurchased will depend on a variety of factors, including the Company s stock price, general economic,
business and market conditions, and alternative investment opportunities. The Company may discontinue any repurchases of its common stock at any time
without prior notice. During the twelve months ended December 31, 2021, the Company repurchased 1,182,410 shares, for an aggregate amount of
$600 million. As of December 31, 2021, $4.4 billion remain available for repurchases. Shares repurchased by the Company are accounted for when the
transaction is settled. As of December 31, 2021, there were no unsettled share repurchases. Direct costs incurred to acquire the shares are included in the total
cost of the shares.
10.
Income Taxes
Income before provision for income taxes was as follows:
2021
United States
Foreign
Income before income taxes
$
$
57
5,365,547
474,556
5,840,103
Year Ended December 31,
2020
(in thousands)
$
$
2,789,064
410,285
3,199,349
2019
$
$
1,719,326
342,905
2,062,231
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The components of provision for income taxes for all periods presented were as follows:
Year Ended December 31,
2020
(in thousands)
2021
Current tax provision:
Federal
State
Foreign
Total current
Deferred tax provision:
Federal
State
Foreign
Total deferred
Provision for income taxes
$
57,526
109,641
357,189
524,356
$
188,937
(2,700)
13,282
199,519
723,875
$
$
24,221
65,821
277,846
367,888
(57,765)
164,685
(36,854)
70,066
437,954
2019
$
21,498
45,228
223,328
290,054
(28,003)
(54,507)
(12,229)
(94,739)
195,315
$
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory Federal income tax rate to income before income
taxes is as follows:
Year Ended December 31,
2020
(in thousands)
2021
Expected tax expense at U.S. Federal statutory rates
State income taxes, net of Federal income tax effect
Foreign earnings at other than U.S. rates
Federal and California R&D tax credits
Valuation allowance on California R&D tax credits
Excess tax benefits on stock-based compensation
Tax effects of the Tax Cuts and Jobs Act
Global corporate structure simplification
Nondeductible Officers Compensation
Other
Provision for income taxes
$
$
Effective Tax Rate
1,226,422
111,400
(23,963)
(82,909)
(290,899)
(254,763)
671,864
65,808
12,212
(113,882)
183,283
(339,436)
(87,194)
26,874
11,713
723,875
30,351
14,948
437,954
12 %
58
$
$
14 %
2019
$
$
433,059
47,909
56,969
(134,523)
(148,693)
(127,534)
35,939
24,111
8,078
195,315
9%