POWERPOINT PROJECT:

We are subject to taxation related risks in multiple jurisdictions.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our
global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are
consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be challenged by jurisdictional tax
authorities, which may have a significant impact on our global provision for income taxes.
Tax laws are being re-examined and evaluated globally. New laws and interpretations of the law are taken into account for financial statement purposes in the
quarter or year that they become applicable. Tax authorities are increasingly scrutinizing the tax positions of companies and we have tax audits pending in several
jurisdictions. Many U.S. states, countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic
Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in jurisdictions where we do
business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of
operations may be adversely impacted.
Risks Related to Human Resources
We may lose key employees or may be unable to hire qualified employees.
We rely on the continued service of our senior management, including our Co-Chief Executive Officers, Reed Hastings and Ted Sarandos, members of our
executive team and other key employees and the hiring of new qualified employees. In our industry, there is substantial and continuous competition for highlyskilled business, product development, technical, creative and other personnel. If we experience high executive turnover, are not successful in recruiting new
personnel or in retaining and motivating existing personnel, in instilling our culture in new employees, or improving our culture as we grow, our operations may be
disrupted.
Labor disputes may have an adverse effect on the Company’s business.
Our partners, suppliers, vendors and we employ the services of writers, directors, actors and other talent as well as trade employees and others who are
subject to collective bargaining agreements in the motion picture industry, both in the U.S. and internationally. Expiring collective bargaining agreements may be
renewed on terms that are unfavorable to us. If expiring collective bargaining agreements cannot be renewed, then it is possible that the affected unions could take
action in the form of strikes or work stoppages. Such actions, as well as higher costs or operating complexities in connection with these collective bargaining
agreements or a significant labor dispute, could have an adverse effect on our business by causing delays in production, added costs or by reducing profit margins.
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Risks Related to Our Stock Ownership
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
Our charter documents may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they: • authorize our board of directors, without stockholder approval, to issue up to 10,000,000 shares of undesignated preferred stock; • provide for a classified board of directors; • prohibit our stockholders from acting by written consent; • establish advance notice requirements for proposing matters to be approved by stockholders at stockholder meetings; and
• prohibit stockholders from calling a special meeting of stockholders.
As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a
business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of
directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.
In addition, a merger or acquisition may trigger retention payments to certain executive employees under the terms of our Amended and Restated Executive
Severance and Retention Incentive Plan, thereby increasing the cost of such a transaction.
Our stock price is volatile.
The price at which our common stock has traded has fluctuated significantly. The price may continue to be volatile due to a number of factors including the
following, some of which are beyond our control: • variations in our operating results, including our membership acquisition and retention, revenues, operating income, net income, net cash provided by
operating activities and free cash flow; • variations between our actual operating results and the expectations of securities analysts, investors and the financial community; • announcements of developments affecting our business, systems or expansion plans by us or others; • competition, including the introduction of new competitors, their pricing strategies and services; • market volatility in general; • the level of demand for our stock, including the amount of short interest in our stock; • the impact of any future stock repurchase program we may adopt; • the operating results of our competitors; and
• other risks and uncertainties described in these risk factors.
As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price.
Following certain periods of volatility in the market price of our securities, we became the subject of securities litigation. We may experience more such
litigation following future periods of volatility. This type of litigation may result in substantial costs and a diversion of management’s attention and resources.
Preparing and forecasting our financial results requires us to make judgments and estimates which may differ materially from actual results.
Given the dynamic nature of our business, and the inherent limitations in predicting the future, forecasts of our revenues, operating margins, net income and
number of paid membership additions and other financial and operating data may differ materially from actual results. Such discrepancies could cause a decline in
the trading price of our common stock. In addition, the preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America also 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. We base such estimates on historical experience and on various other
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assumptions that we believe to be reasonable under the circumstances, but actual results may differ from these estimates. For example, we estimate the content
amortization pattern, beginning with the month of first availability, of any particular licensed or produced television series, documentary or feature film based upon
various factors including historical and estimated viewing patterns. If actual viewing patterns differ from these estimates, the pattern and/or period of amortization
would be changed and could affect the timing or recognition of content amortization. If we revise such estimates it could result in greater in-period expenses,
which could cause us to miss our earnings guidance or negatively impact the results we report which could negatively impact our stock price.
General Risk Factors
We are engaged in legal proceedings that could cause us to incur unforeseen expenses and could occupy a significant amount of our management’s time
and attention.
From time to time, we are subject to litigation or claims that could negatively affect our business operations and financial position. As we have grown, we
have seen a rise in the number of litigation matters against us. These matters have included copyright and other claims related to our content, patent infringement
claims, tax litigation, employment related litigation, as well as consumer and securities class actions, each of which are typically expensive to defend. Litigation
disputes could cause us to incur unforeseen expenses, result in content unavailability, service disruptions, and otherwise occupy a significant amount of our
management’s time and attention, any of which could negatively affect our business operations and financial position. We also from time to time receive inquiries
and subpoenas and other types of information requests from government authorities and we may become subject to related claims and other actions related to our
business activities. While the ultimate outcome of investigations, inquiries, information requests and related legal proceedings is difficult to predict, such matters
can be expensive, time-consuming and distracting, and adverse resolutions or settlements of those matters may result in, among other things, modification of our
business practices, reputational harm or costs and significant payments, any of which could negatively affect our business operations and financial position.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We have leased principal properties in both Los Gatos, California, which is the location of our corporate headquarters, and in Los Angeles, California. In
addition, we lease various office and production space throughout the world.
We believe that our existing facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed
to accommodate any further physical expansion of operations and for any additional offices.
Item 3. Legal Proceedings
Information with respect to this item may be found in Note 7 Commitments and Contingencies 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, under the caption “Legal Proceedings”
which information is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
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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, 2020, there were approximately 1,977 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.
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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, 2020, 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, 2015, December 31, 2016, December 31, 2017, December 31, 2018, December 31, 2019
and December 31, 2020. 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. Selected Financial Data
The following selected consolidated financial data is not necessarily indicative of results of future operations and should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”
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Consolidated Statements of Operations:
Year ended December 31,
2020 2019 2018 2017 2016
(in thousands, except per share data)
Revenues $ 24,996,056 $ 20,156,447 $ 15,794,341 $ 11,692,713 $ 8,830,669
Operating income 4,585,289 2,604,254 1,605,226 838,679 379,793
Operating margin 18 % 13 % 10 % 7 % 4 %
Net income 2,761,395 1,866,916 1,211,242 558,929 186,678
Earnings per share:
Basic $ 6.26 $ 4.26 $ 2.78 $ 1.29 $ 0.44
Diluted $ 6.08 $ 4.13 $ 2.68 $ 1.25 $ 0.43
Weighted-average common
shares outstanding:
Basic 440,922 437,799 435,374 431,885 428,822
Diluted 454,208 451,765 451,244 446,814 438,652
Consolidated Statements of Cash Flows:
Year Ended December 31,
2020 2019 2018 2017 2016
(in thousands)
Net cash provided by (used in) operating activities $ 2,427,077 $ (2,887,322) $ (2,680,479) $ (1,785,948) $ (1,473,984)
Free cash flow (1) 1,921,723 (3,274,386) (3,019,599) (2,019,659) (1,659,755)
(1) Free cash flow is defined as net cash provided by (used in) operating activities less purchases of property and equipment and change in other assets. See
Liquidity and Capital Resources in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a reconciliation of
“free cash flow” to “net cash provided by (used in) operating activities.”
Consolidated Balance Sheets:
As of December 31,
2020 2019 2018 2017 2016
(in thousands)
Cash, cash equivalents and short-term investments $ 8,205,550 $ 5,018,437 $ 3,794,483 $ 2,822,795 $ 1,733,782
Total content assets, net 25,383,950 24,504,567 20,102,327 14,668,688 10,975,393
Total assets 39,280,359 33,975,712 25,974,400 19,012,742 13,586,610
Short-term and long-term debt 16,308,973 14,759,260 10,360,058 6,499,432 3,364,311
Non-current content liabilities 2,618,084 3,334,323 3,759,026 3,329,796 2,894,654
Total content liabilities 7,047,620 7,747,884 8,440,588 7,497,520 6,515,920
Total stockholders’ equity 11,065,240 7,582,157 5,238,765 3,581,956 2,679,800
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Other Data:
As of / Year Ended December 31,
2020 2019 2018 2017 2016
(in thousands)
Global streaming paid memberships at end of period 203,663 167,090 139,259 110,644 89,090
Global streaming paid net membership additions 36,573 27,831 28,615 21,554 18,251
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.
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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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items
and year-to-year comparisons between 2019 and 2018 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, 2019.
Results of Operations
The following represents our consolidated performance highlights:
As of/ Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except revenue per membership and percentages)
Financial Results:
Streaming revenues $ 24,756,675 $ 19,859,230 $ 15,428,752 25 %
DVD revenues 239,381 297,217 365,589 (19) %
Total revenues $ 24,996,056 $ 20,156,447 $ 15,794,341 24 %
Global Streaming Memberships:
Paid net membership additions 36,573 27,831 28,615 31 %
Paid memberships at end of period 203,663 167,090 139,259 22 %
Average paying memberships 189,083 152,984 124,658 24 %
Average monthly revenue per paying membership $ 10.91 $ 10.82 $ 10.31 1 %
Operating income $ 4,585,289 $ 2,604,254 $ 1,605,226 76 %
Operating margin 18 % 13 % 10 % 38 %
Consolidated revenues for the year ended December 31, 2020 increased 24% as compared to the year ended December 31, 2019. The increase in our
consolidated revenues was due to the 24% growth in average paying memberships and a 1% increase in average monthly revenue per paying membership. The
increase in average monthly revenue per paying membership resulted from our price changes and plan mix, partially offset by unfavorable fluctuations in foreign
exchange rates. Paid net membership additions for the year ended December 31, 2020 increased 31% as compared to the year ended December 31, 2019, as a result
of the long term trend toward streaming on demand entertainment and due to the COVID-19 pandemic and resulting social restrictions and local government
mandates of home confinement in certain jurisdictions.
The increase in operating margin is due primarily to increased revenues and decreased marketing costs, coupled with cost of revenues, technology and
development, and general and administrative costs growing at a slower rate as compared to the 24% increase in revenues.
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. In an effort to
protect the health and safety of our employees, our workforce has had and continues in most instances to spend a significant amount of time working from home,
international travel has been severely curtailed and many of our productions continue to experience disruption, as are the productions of our third-party content
suppliers. Our 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. While we and our partners have resumed productions and related operations in many parts of the world, our ability to
produce content remains affected by the pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various
measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolate
residents to their homes or places of residence, and practice social distancing. We anticipate that these actions and the global health crisis caused by COVID-19,
including any resurgences, will continue to negatively impact business activity across the globe. We will continue to actively monitor the situation 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,
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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
customers, 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, 2020, pricing on our plans ranged from the U.S. dollar equivalent of $2
to $24 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, 2020, 2019 and
2018.
United States and Canada (UCAN)
As of/ Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except revenue per membership and percentages)
Revenues $ 11,455,396 $ 10,051,208 $ 8,281,532 $ 1,404,188 14 %
Paid net membership additions 6,274 2,905 6,335 3,369 116 %
Paid memberships at end of period (1) 73,936 67,662 64,757 6,274 9 %
Average paying memberships 71,689 66,615 61,845 5,074 8 %
Average monthly revenue per paying membership $ 13.32 $ 12.57 $ 11.16 $ 0.75 6 %
Constant currency change (2) 6 %
Europe, Middle East, and Africa (EMEA)
As of/ Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except revenue per membership and percentages)
Revenues $ 7,772,252 $ 5,543,067 $ 3,963,707 $ 2,229,185 40 %
Paid net membership additions 14,920 13,960 11,814 960 7 %
Paid memberships at end of period (1) 66,698 51,778 37,818 14,920 29 %
Average paying memberships 60,425 44,731 31,601 15,694 35 %
Average monthly revenue per paying membership $ 10.72 $ 10.33 $ 10.45 $ 0.39 4 %
Constant currency change (2) 3 %
Latin America (LATAM)
As of/ Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except revenue per membership and percentages)
Revenues $ 3,156,727 $ 2,795,434 $ 2,237,697 $ 361,293 13 %
Paid net membership additions 6,120 5,340 6,360 780 15 %
Paid memberships at end of period (1) 37,537 31,417 26,077 6,120 19 %
Average paying memberships 35,297 28,391 22,767 6,906 24 %
Average monthly revenue per paying membership $ 7.45 $ 8.21 $ 8.19 $ (0.76) (9)%
Constant currency change (2) 8 %
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Asia-Pacific (APAC)
As of/ Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except revenue per membership and percentages)
Revenues $ 2,372,300 $ 1,469,521 $ 945,816 $ 902,779 61 %
Paid net membership additions 9,259 5,626 4,106 3,633 65 %
Paid memberships at end of period (1) 25,492 16,233 10,607 9,259 57 %
Average paying memberships 21,674 13,247 8,446 8,427 64 %
Average monthly revenue per paying membership $ 9.12 $ 9.24 $ 9.33 $ (0.12) (1)%
Constant currency change (2) (1)%
(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, 2020,
our revenues would have been approximately $596 million higher had foreign currency exchange rates remained constant with those for the year ended
December 31, 2019.
Cost of Revenues
Amortization of content assets makes up the majority of cost of revenues. Expenses 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 incurred in making our content available to members.
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Cost of revenues $ 15,276,319 $ 12,440,213 $ 9,967,538 $ 2,836,106 23 %
As a percentage of revenues 61 % 62 % 63 %
The increase in cost of revenues for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to a $1,591
million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Expenses associated with
the acquisition, licensing and production of content increased $1,101 million, primarily due to expenses related to the COVID-19 pandemic and continued growth
in our content production activities. Streaming delivery costs and other operations costs increased driven by our growing member base.
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, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Marketing $ 2,228,362 $ 2,652,462 $ 2,369,469 $ (424,100) (16)%
As a percentage of revenues 9 % 13 % 15 %
The decrease in marketing expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to a $432
million decrease in advertising expenses, partially offset by increased payments to our marketing partners.
Technology and Development
Technology and development expenses consist of payroll and related expenses for all technology personnel, as well as other costs incurred in making
improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendations, merchandising and streaming
delivery technology and infrastructure. Technology and development expenses also include costs associated with computer hardware and software.
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Technology and development $ 1,829,600 $ 1,545,149 $ 1,221,814 $ 284,451 18 %
As a percentage of revenues 7 % 8 % 8 %
The increase in technology and development expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was
primarily due to a $254 million increase in personnel-related costs, including increases in compensation for existing employees and 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, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
General and administrative $ 1,076,486 $ 914,369 $ 630,294 $ 162,117 18 %
As a percentage of revenues 4 % 5 % 4 %
The increase in general and administrative expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily
due to a $128 million increase in personnel-related costs, including increases in compensation for existing employees and growth in average headcount to support
the increase in our production activity and continued improvements in our streaming service.
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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Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Interest expense $ 767,499 $ 626,023 $ 420,493 $ 141,476 23 %
As a percentage of revenues 3 % 3 % 3 %
Interest expense for the year ended December 31, 2020 consisted primarily of $749 million of interest on our Notes. The increase in interest expense for the
year ended December 31, 2020 as compared to the year ended December 31, 2019 is due to the increase in debt.
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.
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Interest and other income (expense) $ (618,441) $ 84,000 $ 41,725 $ (702,441) (836)%
As a percentage of revenues (2)% — % — %
Interest and other income (expense) decreased primarily due to foreign exchange losses of $660 million for the year ended December 31, 2020 as compared
to a gain of $7 million for the year ended December 31, 2019. The foreign exchange loss in the year ended December 31, 2020 was primarily driven by the noncash $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, Change
2020 2019 2018 2020 vs. 2019
(in thousands, except percentages)
Provision for income taxes $ (437,954) $ (195,315) $ (15,216) $ (242,639) (124)%
Effective tax rate 14 % 9 % 1 %
As of December 31, 2020, we had a California research and development (“R&D”) credit carryforward of $250 million, which can be carried forward
indefinitely. On June 29, 2020, California enacted legislative changes that impose an annual cap of $5 million on the amount of business incentive tax credits we
can utilize in California effective for tax years 2020 through 2022. As a result, we evaluated our ability to realize the California R&D credit, and considered all
available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income and determined it is more likely
than not that the pre-2020 credits and a portion of the current year R&D credit would not be realized. In the twelve months ended December 31, 2020 we recorded
a valuation allowance of $250 million. We will monitor our business strategies, weighing positive and negative evidence in assessing the realization of this asset in
the future and in the event there is a need to release the valuation allowance, a tax benefit will be recorded.
The increase in our effective tax rate for the year ended December 31, 2020 as compared to the year ended December 31, 2019 is primarily due to the
establishment of a valuation allowance on the California R&D credit, partially offset by the recognition of excess tax benefits of stock-based compensation.
In 2020, the difference between our 14% 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 Federal and California R&D credits, partially offset by the establishment of a valuation allowance on the California R&D credit.
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Liquidity and Capital Resources
Year Ended December 31, Change
2020 2019 2020 vs. 2019
(in thousands)
Cash, cash equivalents and restricted cash $ 8,238,870 $ 5,043,786 $ 3,195,084 63 %
Short-term and long-term debt 16,308,973 14,759,260 1,549,713 10 %
Cash, cash equivalents and restricted cash increased $3,195 million in the year ended December 31, 2020 primarily due to cash provided by operations
coupled with the issuance of debt.
Debt, net of debt issuance costs, increased $1,550 million primarily due to the issuance of debt in April 2020 coupled with the remeasurement of our eurodenominated notes. The amount of principal and interest due in the next twelve months is $1,264 million. As of December 31, 2020, no amounts had been
borrowed under our $750 million Revolving Credit Agreement. See Note 6 Debt in the accompanying notes to our consolidated financial statements.
As our cash provided by operating activities improved in 2020, 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.
As our cash provided by operating activities grows and exceeds our minimum cash needs, our future capital allocation may include stock repurchase
programs. The timing and magnitude of such programs will depend on, among other things, our development efforts, business plans and operating performance.
Our primary uses of cash include the acquisition, licensing and production of content, streaming delivery, marketing programs and personnel-related costs.
Cash payment terms for non-original content have historically been 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, which will impact our liquidity. 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 at least the next twelve months.
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 semiannual interest payments on our outstanding debt. Our receivables from members generally settle quickly.
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Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019
(in thousands)
Net cash provided by (used in) operating activities $ 2,427,077 $ (2,887,322) $ (2,680,479) $ 5,314,399 184 %
Net cash used in investing activities (505,354) (387,064) (339,120) (118,290) (31)%
Net cash provided by financing activities 1,237,311 4,505,662 4,048,527 (3,268,351) (73)%
Non-GAAP reconciliation of free cash flow:
Net cash provided by (used in) operating activities 2,427,077 (2,887,322) (2,680,479) 5,314,399 184 %
Purchases of property and equipment (497,923) (253,035) (173,946) (244,888) (97)%
Change in other assets (7,431) (134,029) (165,174) 126,598 94 %
Free cash flow $ 1,921,723 $ (3,274,386) $ (3,019,599) $ 5,196,109 159 %
While we and our partners have resumed productions and related operations in many parts of the world, our ability to produce content remains affected by the
pandemic. As a result, the timing of certain production payments has been and will continue to be delayed until productions can resume and may be shifted to
future years. Net cash provided by operating activities increased $5,314 million from the year ended December 31, 2019 to $2,427 million for the year ended
December 31, 2020 primarily driven by a $4,840 million or 24% increase in revenues coupled with a decrease in cash payments for content assets. The payments
for content assets decreased $2,074 million, from $14,611 million to $12,537 million, or 14%, as compared to the increase in the amortization of content assets of
$1,591 million, from $9,216 million to $10,807 million, or 17%. 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 $118 million, primarily due to an increase in purchases of property and equipment.
Net cash provided by financing activities decreased $3,268 million primarily due to a decrease in the proceeds from the issuance of debt of $3,431 million
from $4,433 million in the year ended December 31, 2019 to $1,002 million in the year ended December 31, 2020, partially offset by an increase in the proceeds
from the issuance of common stock of $163 million.
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 for deferred
taxes due to recent legislation which imposed an annual cap on research and development credits.
Free cash flow was $5,141 million lower than net income for the year ended December 31, 2019 primarily due to $5,394 million of cash payments for
streaming content assets over streaming amortization expense, $46 million non-cash remeasurement gain on our euro-denominated debt, and $106 million in other
non-favorable working capital differences, partially offset by $405 million of non-cash stock-based compensation expense.
Contractual Obligations
For the purpose of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and
that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing
of the transaction. The expected timing of the payment of the obligations discussed below is estimated based on information available to us as of December 31,

  1. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for
    some obligations. The following table summarizes our contractual obligations at December 31, 2020:
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    Payments due by Period
    Contractual obligations (in thousands): Total
    Less than
    1 year 1-3 years 3-5 years
    More than
    5 years
    Content obligations (1) $ 19,218,830 $ 8,980,868 $ 7,819,563 $ 1,973,091 $ 445,308
    Debt (2) 21,857,087 1,264,020 2,136,997 3,614,906 14,841,164
    Operating lease obligations (3) 2,838,985 345,442 651,801 577,253 1,264,489
    Other purchase obligations (4) 809,383 562,970 241,194 5,219 — Total $ 44,724,285 $ 11,153,300 $ 10,849,555 $ 6,170,469 $ 16,550,961
    (1) As of December 31, 2020, content obligations were 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 then meet the criteria for recognition.
    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 included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K 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, 2020, the Company has additional operating leases for real estate that have not yet commenced of $256 million which has been included
    above. Total lease obligations as of December 31, 2020 increased $82 million from $2,757 million as of December 31, 2019 to $2,839 million as of
    December 31, 2020 due to growth in facilities to support our growing headcount and growing number of original productions.
    (4) Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to streaming delivery and cloud
    computing costs, as well as other miscellaneous open purchase orders for which we have not received the related services or goods.
    As of December 31, 2020, we had gross unrecognized tax benefits of $140 million, of which $38 million was classified in “Other non-current liabilities” and
    $54 million as a reduction to deferred tax assets which was classified as “Other non-current assets” 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.
    Off-Balance Sheet Arrangements
    We do not have transactions with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, whereby we have
    financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks,
    contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk
    support to us.
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    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 Policies and 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, for instance due to additional merchandising
    and marketing efforts, 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. 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
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    Table of Contents
    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 businesses. 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, 2020 the valuation allowance of $250 million was related to the California research and development credits 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, 2020, our estimated gross unrecognized tax benefits were $140 million of which $86 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 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, 2020, 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, 2020, we had $16.4 billion of debt, consisting of fixed rate unsecured debt in sixteen tranches due between 2021 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 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 54% of the consolidated amount for the year ended December 31, 2020. 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, 2020, our revenues would have been approximately $596 million higher had
    foreign currency exchange rates remained constant with those for the year ended December 31, 2019.
    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, 2020, we recognized a
    $660 million foreign exchange loss primarily due to the non-cash remeasurement of our Senior Notes denominated in euros, coupled with 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, 2020 was an increase of $36 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.
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    Table of Contents
    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

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