NETFLIX, INC. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 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 endedDecember 31, 2018 . Results of Operations The following represents our consolidated performance highlights: As of/ Year Ended December 31, Change 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 (in thousands, except revenue per membership and percentages) Global Streaming Memberships: Paid net membership additions 27,831 28,615 21,554 (3 )% 33 %
Paid memberships at end of period 167,090 139,259 110,644
20 % 26 %
Average paying memberships 152,984 124,658 99,323 23 % 26 %
Average monthly revenue per paying
membership $ 10.82 $ 10.31 $ 9.43 5 % 9 %
Financial Results:
Streaming revenues $ 19,859,230 $ 15,428,752 $ 11,242,216 29 % 37 %
DVD revenues 297,217 365,589 450,497 (19 )% (19 )%
Total revenues $ 20,156,447 $ 15,794,341 $ 11,692,713 28 % 35 %
Operating income $ 2,604,254 $ 1,605,226 $ 838,679 62 % 91 %
Operating margin 13 % 10 % 7 % 30 % 43 %
Consolidated revenues for the year ended December 31, 2019 increased 28% as
compared to the year ended December 31, 2018 . The increase in our consolidated
revenues was due to the 23% growth in average paying memberships and a 5%
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.
The increase in operating margin is due primarily to increased revenues,
partially offset by increased content expenses as we continue to acquire,
license and produce content, including more Netflix originals, as well as
increased marketing expenses and headcount costs to support continued
improvements in our streaming service, our international expansion, and our
growing content production activities.
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, 2019 , pricing on our plans ranged from the U.S. dollar equivalent
of $3 to $22 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, 2019 , 2018 and 2017.
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As of/ Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except revenue per membership and percentages)
Revenues $ 10,051,208 $ 8,281,532 $ 6,660,859 $ 1,769,676 21 % $ 1,620,673 24 %
Paid net membership
additions 2,905 6,335 5,512 (3,430 ) (54 )% 823 15 %
Paid memberships at
end of period 67,662 64,757 58,422 2,905 4 % 6,335 11 %
Average paying
memberships 66,615 61,845 55,660 4,770 8 % 6,185 11 %
Average monthly
revenue per paying
membership $ 12.57 $ 11.16 $ 9.97 $ 1.41 13 % $ 1.19 12 %
Constant currency
change (1) 13 % 12 %
As of/ Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except revenue per membership and percentages)
Revenues $ 5,543,067 $ 3,963,707 $ 2,362,813 $ 1,579,360 40 % $ 1,600,894 68 %
Paid net membership
additions 13,960 11,814 8,173 2,146 18 % 3,641 45 %
Paid memberships at
end of period 51,778 37,818 26,004 13,960 37 % 11,814 45 %
Average paying
memberships 44,731 31,601 21,476 13,130 42 % 10,125 47 %
Average monthly
revenue per paying
membership $ 10.33 $ 10.45 $ 9.17 $ (0.12 ) (1 )% $ 1.28 14 %
Constant currency
change (1) 4 % 9 %
Latin America (LATAM)
As of/ Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except revenue per membership and percentages)
Revenues $ 2,795,434 $ 2,237,697 $ 1,642,616 $ 557,737 25 % $ 595,081 36 %
Paid net membership
additions 5,340 6,360 5,509 (1,020 ) (16 )% 851 15 %
Paid memberships at
end of period 31,417 26,077 19,717 5,340 20 % 6,360 32 %
Average paying
memberships 28,391 22,767 16,917 5,624 25 % 5,850 35 %
Average monthly
revenue per paying
membership $ 8.21 $ 8.19 $ 8.09 $ 0.02 - % $ 0.10 1 %
Constant currency
change (1) 13 % 13 %
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Table of ContentsAsia-Pacific (APAC) As of/ Year Ended December 31, Change 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 (in thousands, except revenue per membership and percentages) Revenues$ 1,469,521 $ 945,816 $ 575,928 $ 523,705 55 %$ 369,888 64 % Paid net membership additions 5,626 4,106 2,360 1,520 37 % 1,746 74 % Paid memberships at end of period 16,233 10,607 6,501 5,626 53 % 4,106 63 % Average paying memberships 13,247 8,446 5,271 4,801 57 % 3,175 60 % Average monthly revenue per paying membership $ 9.24$ 9.33 $ 9.11 $ (0.09 ) (1 )%$ 0.22 2 % Constant currency change (1) 3 % 3 % (1) 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 endedDecember 31, 2019 , our revenues would have been approximately$762 million higher had foreign currency exchange rates remained constant with those for the year endedDecember 31, 2018 . Cost of Revenues Amortization of streaming content assets makes up the majority of cost of revenues. Expenses associated with the acquisition, licensing and production of streaming content (such as payroll and related personnel expenses, costs associated with obtaining rights to music included in our content, overall deals with talent, miscellaneous production related costs and participations and residuals), streaming delivery costs and other operations costs make up the remainder of cost of revenues. We have built our own global content delivery network ("Open Connect") to help us efficiently stream a high volume of content to our members over the internet. Streaming delivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs, such as cloud computing costs, associated with delivering streaming content over the internet. Other operations costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs incurred in making our content available to members. Year Ended December 31, Change 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 (in thousands, except percentages) Cost of revenues$ 12,440,213 $ 9,967,538 $ 8,033,000 $ 2,472,675 25 %$ 1,934,538 24 % As a percentage of revenues 62 % 63 % 69 % The increase in cost of revenues for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 was primarily due to a$1,684 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased$789 million primarily due to increases in expenses associated with the acquisition, licensing and production of streaming content as well as increased payment processing fees 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 promotional activities such as digital and television advertising. Marketing expenses also include payroll and related expenses for personnel that support marketing activities. 22
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Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
Marketing $ 2,652,462 $ 2,369,469 $ 1,436,281 $ 282,993 12 % $ 933,188 65 %
As a percentage of
revenues 13 % 15 % 12 %
The increase in marketing expenses for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 was primarily due to a $139 million
increase in personnel-related expenses, including increases in compensation for
existing employees and growth in average headcount, as well as increased
advertising and 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 recommendation, 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
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
Technology and
development $ 1,545,149 $ 1,221,814 $ 953,710 $ 323,335 26 % $ 268,104 28 %
As a percentage of
revenues 8 % 8 % 8 %
The increase in technology and development expenses for the year ended December
31, 2019 as compared to the year ended December 31, 2018 was primarily due to a
$305 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. In addition, third-party expenses, including costs associated
with cloud computing, increased $18 million .
General and Administrative
General and administrative expenses consist of payroll and related expenses for
corporate personnel. General and administrative expenses also includes
professional fees and other general corporate expenses.
Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
General and
administrative $ 914,369 $ 630,294 $ 431,043 $ 284,075 45 % $ 199,251 46 %
As a percentage of
revenues 5 % 4 % 4 %
General and administrative expenses for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 increased primarily due to a $233
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.
In addition, third-party expenses, including costs for contractors and
consultants, increased $40 million .
Interest Expense
Interest expense consists primarily of the interest associated with our
outstanding long-term debt obligations, including the amortization of debt
issuance costs. See Note 4 Long-term 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 of our long-term debt obligations.
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Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
Interest expense $ (626,023 ) $ (420,493 ) $ (238,204 ) $ 205,530 49 % $ 182,289 77 %
As a percentage of
revenues (3 )% (3 )% (2 )%
Interest expense for the year ended December 31, 2019 consists primarily of $614
million of interest on our Notes. The increase in interest expense for the year
ended December 31, 2019 as compared to the year ended December 31, 2018 is due
to the increase in long-term 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
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
Interest and other
income (expense) $ 84,000 $ 41,725 $ (115,154 ) $ 42,275 101 % $ 156,879 136 %
As a percentage of
revenues - % - % (1 )%
Interest and other income (expense) for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 increased primarily due to a $30
million increase in interest income earned on cash balances, coupled with
foreign exchange gains. The foreign exchange gain of $7 million in the year
ended December 31, 2019 was primarily driven by the $46 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 of our European and U.S. entities.
Provision for (Benefit from) Income Taxes
Year Ended December 31, Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(in thousands, except percentages)
Provision for $ 195,315 $ 15,216 $ (73,608 ) $ 180,099 1,184 % 88,824 (121 )%
(benefit from)
income taxes
Effective tax rate 9 % 1 % (15 )%
In connection with the Tax Cuts and Jobs Act of 2017, we simplified our global
corporate structure, effective April 1, 2019 . The tax impacts of such
simplifications were not material to the financial statements taken as a whole.
During the fourth quarter of 2019, the United States Treasury issued final
regulations with respect to certain aspects related to the Tax Cuts and Jobs Act
of 2017. Additional guidance provided in these regulations resulted in a tax
adjustment in the fourth quarter of 2019. We paid U.S. Federal taxes for the
full year inclusive of this fourth quarter adjustment.
The increase in our effective tax rate for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 is primarily due to the global
corporate structure simplification, lower benefit from the recognition of excess
tax benefits of stock-based compensation, and a lower benefit on a percentage
basis from Federal and California research and development ("R&D") credits. The
one-time transition tax benefit under Staff Accounting Bulletin No. 118 ("SAB
118") that provided a measurement period to address the U.S. GAAP impacts
associated with the Tax Cuts and Jobs Act of 2017 is no longer applicable in
2019.
In 2019, the difference between our 9% effective tax rate and the Federal
statutory rate of 21% was primarily due to the recognition of excess tax
benefits of stock-based compensation, Federal and California R&D credits, and
the international provisions from the U.S. tax reform enacted in 2017, partially
offset by state taxes, foreign taxes, and non-deductible expenses.
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Liquidity and Capital Resources
Year Ended December 31,
2019 2018
(in thousands)
Cash, cash equivalents and restricted cash
14,759,260 10,360,058
Cash, cash equivalents and restricted cash increased $1,232 million in the year
ended December 31, 2019 primarily due to the issuance of debt, partially offset
by cash used in operations.
Long-term debt, net of debt issuance costs, increased $4,399 million due to
long-term note issuances in 2019. The earliest maturity date for our outstanding
long-term debt is February 2021 . As of December 31, 2019 , no amounts had been
borrowed under our $750 million Revolving Credit Agreement. See Note 4 Long-term
Debt in the accompanying notes to our consolidated financial statements. We
anticipate continuing to finance our future capital needs in the debt market.
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.
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 streaming
content, particularly in original content, which will impact our liquidity and
result in future net cash used in operating activities and negative free cash
flows for many years. 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 and investing
activities excluding the non-operational cash flows from purchases, maturities
and sales of short-term investments. 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 investments and for
certain other activities or the amount of cash used in operations, including
investments in global streaming content. 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 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 three major recurring differences are
excess content payments over amortization, non-cash stock-based compensation
expense 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.
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Year Ended December 31,
2019 2018 2017
(in thousands)
Net cash used in operating activities $ (2,887,322 ) $ (2,680,479 ) $ (1,785,948 )
Net cash provided by (used in) investing activities (387,064 ) (339,120 ) 34,329
Net cash provided by financing activities 4,505,662 4,048,527 3,076,990
Non-GAAP free cash flow reconciliation: Net cash used in operating activities (2,887,322 ) (2,680,479 ) (1,785,948 ) Purchases of property and equipment (253,035 ) (173,946 ) (173,302 ) Change in other assets (134,029 ) (165,174 ) (60,409 ) Free cash flow$ (3,274,386 ) $ (3,019,599 ) $ (2,019,659 ) Net cash used in operating activities increased$207 million from the year endedDecember 31, 2018 to$2,887 million for the year endedDecember 31, 2019 . The increased use of cash was primarily driven by the increase in investments in streaming content that require more upfront payments, partially offset by a$4,362 million or 28% increase in revenues. The payments for streaming content assets increased$2,567 million , from$12,044 million to$14,611 million , or 21%, as compared to the increase in the amortization of streaming content assets of$1,684 million , from$7,532 million to$9,216 million , or 22%. 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, our international expansion and increased content production activities. Net cash used in investing activities increased$48 million , primarily due to an increase in purchases of property and equipment. Net cash provided by financing activities increased$457 million due to an increase in the proceeds from the issuance of debt of$507 million from$3,926 million in the year endedDecember 31, 2018 to$4,433 million in the year endedDecember 31, 2019 . In addition, we had a decrease in the proceeds from the issuance of common stock of$52 million . Free cash flow was$5,141 million lower than net income for the year endedDecember 31, 2019 primarily due to$5,394 million of cash payments for streaming content assets over streaming amortization expense and$152 million in other non-favorable working capital differences, partially offset by$405 million of non-cash stock-based compensation expense. Contractual Obligations For the purpose of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of the payment of the obligations discussed below is estimated based on information available to us as ofDecember 31, 2019 . Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. The following table summarizes our contractual obligations atDecember 31, 2019 : Payments due by Period Contractual obligations Less than More than (in thousands): Total 1 year 1-3 years 3-5 years 5 years Streaming content obligations (1)$ 19,490,082 $ 8,477,367 $ 8,352,731 $ 2,041,340 $ 618,644 Debt (2) 20,723,441 736,969 2,581,471 1,705,201 15,699,800 Operating lease obligations (3) 2,756,893 277,642 571,313 521,124 1,386,814 Other purchase obligations (4) 894,108 624,674 232,492 36,612 330 Total$ 43,864,524 $ 10,116,652 $ 11,738,007 $ 4,304,277 $ 17,705,588 (1) As ofDecember 31, 2019 , streaming content obligations were comprised of
"Non-current content liabilities" on the Consolidated Balance Sheets and
Balance Sheets as they did not then meet the criteria for recognition.
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Streaming content obligations include amounts related to the acquisition, licensing and production of streaming 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) Long-term debt obligations include our Notes consisting of principal and
interest payments. See Note 4 Long-term 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 3 Leases in the accompanying notes to our consolidated financial
statements for further details regarding leases. As of
the Company has additional operating leases for real estate that have not
yet commenced of
obligations as of
million as of
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 ofDecember 31, 2019 , we had gross unrecognized tax benefits of$67 million which was classified in "Other non-current liabilities" and 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. Indemnifications The information set forth under Note 6 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 inthe 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. 27
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Streaming Content We acquire, license and produce content, including original programing, in order to offer our members unlimited viewing of 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 streaming assets and the changes in related liabilities, are classified within "Net cash used in operating activities" on the Consolidated Statements of Cash Flows. We recognize content assets (licensed and produced) as "Non-current content assets, net" on the Consolidated Balance Sheet. For licenses, 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 productions, 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 streaming 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 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. AtDecember 31, 2019 the valuation allowance of$135 million was primarily related to foreign tax credits that we are not expected 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. AtDecember 31, 2019 , our estimated gross unrecognized tax benefits were$67 million of which$57 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 8 to the consolidated financial statements for further information regarding income taxes. 28
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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.
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Historical Segment Information
Historically, we reported contribution profit (loss) for three segments:
Domestic streaming, International streaming and Domestic DVD, which was
reflective of how our chief operating decision maker ("CODM") reviewed financial
information for the purposes of making operating decisions, assessing financial
performance and allocating resources. Contribution profit (loss) is defined as
revenues less cost of revenues and marketing expenses incurred by the segment.
Because we increasingly obtain multi-territory or global rights for streaming
content, contribution profit (loss) on a regional basis is no longer a
meaningful metric reviewed by the CODM or used in the allocation of resources.
Effective in the fourth quarter of 2019, we operate as a single operating
segment. Our CODM is our chief executive officer, who reviews financial
information presented on a consolidated basis for purposes of making operating
decisions, assessing financial performance and allocating resources.
As the transition to one segment occurred during 2019, we are providing
supplemental pro-forma information reflecting our historic segment reporting as
if it had remained in place for the full year ended December 31, 2019 as
follows:
As of/Year ended December 31, 2019
Domestic International Domestic
Streaming Streaming DVD Consolidated
(in thousands)
Total paid memberships at end
of period 61,043 106,047 2,153
Total paid net membership
additions (losses) 2,557 25,274 (553 )
Revenues $ 9,243,005 $ 10,616,225 $ 297,217 $ 20,156,447
Cost of revenues 4,867,343 7,449,663 123,207 12,440,213
Marketing 1,063,042 1,589,420 - 2,652,462
Contribution profit $ 3,312,620 $ 1,577,142 $ 174,010 5,063,772
Other operating expenses 2,459,518
Operating income 2,604,254
Other income (expense) (542,023 )
Provision for income taxes 195,315
Net income $ 1,866,916 © Edgar Online, source
