Netflix, Inc. (NFLX) is a media company that offers consumers the ability to buy movie and TV entertainment services. Though the company has since adapted to a largely subscription-based model allowing customers to watch streaming television and movies online, Netflix still offers its original DVD service. Since the fourth quarter 2019, Netflix operates as a single business segment, no longer reporting across domestic streaming, international streaming, and domestic DVD segments. In recent years, competition in the streaming media business has grown fierce, with companies including The Walt Disney Co. (DIS), Amazon, Inc. (AMZN), and Apple, Inc. (AAPL) launching services to rival Netflix.

Key Takeaways

  • Netflix is a media company primarily known for its subscription streaming services offering access to a wide range of movies and television programs.
  • Netflix's international streaming memberships were the company's fastest-growing category in 2019.
  • In an effort to build on its early lead in the streaming space, Netflix has substantially expanded its offerings of original programming in recent years.

Netflix's Financials

Netflix has posted negative cash flow since 2011 due largely to the company's strategy of spending heavily to finance growth, including the production of original entertainment. Despite that negative cash flow, Netflix has seen significant gains to its net income and revenue in recent years. For the fiscal year 2019, annual net income was $1.9 billion, up 54.1% year-over-year (YOY).

Although Netflix now operates as a single business segment, the company's 10-K for the fiscal year 2019 provided supplemental information reflecting historic segment reporting. The 2019 contributions to profit for domestic streaming, international streaming, and domestic DVD, respectively, were $3.3 billion, $1.6 billion, and $174.0 million. Domestic streaming comprises two-thirds of profits even though it accounts for less than half of revenue.

In 2019, Netflix reported revenue of $20.2 billion, up 27.6% YOY. Like net income, Netflix's revenue has grown at an impressive clip. Since 2015, for instance, revenue has nearly tripled and net income has grown by more than 14 times.

Netflix's Business Segments

Unlike many other media companies, Netflix does not sell ad space on its site, nor does it sell its user data. Essentially, the only source of revenue for the company is its subscriptions. Streaming services are available at three tiers, with higher-cost subscriptions offering streaming to additional devices and in higher definition. Although it now operates as a single business segment, it's worth taking a closer look at the company's historic segments.

Domestic Streaming

Domestic streaming includes subscriptions to customers within the United States. This portion of Netflix's business has grown quickly in the past year, leading to more than 61 million paid memberships by the end of 2019, but it has been outpaced by international streaming. After the cost of revenues and marketing, domestic streaming accounted for $3.3 billion of contribution profit, the largest of any category. Based on supplemental information in Netflix's reports, domestic streaming posted $9.2 billion in revenue in 2019 or 45.8% of the total.

International Streaming

With more subscriptions than domestic streaming by a factor of roughly 75%, international streaming also accounts for the largest revenue, generating more than $10.6 billion in 2019. International streaming ended the year with more than 106 million paid memberships. However, after cost of revenues and marketing, international streaming for 2019 saw a contribution profit of $1.6 billion, about half that of domestic streaming. Based on supplemental information in Netflix's financial statements, international streaming revenue was $10.6 billion in 2019 or 52.7% of the total.

Domestic DVD

Netflix's original DVD subscription service continues, although it is in decline. By the end of 2019, only about 2.2 million domestic DVD subscriptions remained. This accounted for less than $300 million in revenues and $200 million in contribution profit for 2019, making it the smallest category by far, and the only category to see a YOY drop in contribution profit and subscription numbers. Based on supplemental information in Netflix's reports, domestic DVDs posted approximately $300 million or 1.5% of revenue.

Netflix Recent Developments

Netflix faces growing competition from a large number of large streaming service rivals. 2019 saw Disney pull all of its content from Netflix's platform to make way for the new Disney+ service, for instance. In response, Netflix has increased its own original and exclusive content. While this effort has required an investment of billions of dollars in production costs, the strategy is getting results.

The Witcher, a television series launched in Dec. 2019, saw 76 million member households tune in, making it Netflix's biggest season one TV series yet. Netflix feature films released last year garnered 24 Academy Award nominations. The company is also developing new ways of growing engagement through interactive programming, including branching narratives in the Bandersnatch episode of Netflix's popular Black Mirror series. Netflix sees these heavy investments as the best way to retain current subscribers and grow its base into new markets as well.