Based on the real Netflix annual report for 2010 available online.
Write a 2-3 page paper in which you:
1. Identify and explain the main sections of the annual report.
The Netflix annual report for the fiscal year ended 2010 is documented on Form-10K and comprises of four main parts numbered using the roman numerals I to IV. Each major part is further subdivided into a number of items. Part I has four items; item 1 is a short introduction cum description of Netflix, Inc which includes its core strategies, competitors, operations, segments, employees, location amongst others. Part 1A describes in depth the nature of risks faced by the company due to the nature of its business as well as those related to the ownership of company stock. Part IB on the other hand is a simple statement denoting the fact that there were no unresolved comments by the company staff as of the time the report was prepared. Details on the location, size in square footage, major use and dates of lease expiry of the company’s principal properties are provided in item 2 of part I. Item 3 is a note on where details of all legal proceedings related to the company can be found in the report. The details of item 4 have been removed from the report and reserved.
Part II comprises of items 5-9. Item 5 provides details regarding the market for Registrant’s common equity, the number of various stakeholders and company re-purchase of equity securities. Meanwhile, item 6 comprises of select financial data which includes details on the amounts of various revenues, numbers and types of subscribers, company liabilities amongst other financial data for the fiscal years ended from 2006 to 2010. The discussion and analysis of the company’s financial condition together with the results of operations from the management’s perspective is provided in item 7. Item 8 consists of details on financial statements and their necessary supplementary data, these are attached at the end of the report that is, in the appendix. Findings on the evaluation of the company’s disclosure controls and procedures as well as those on the assessment of the effectiveness of Netflix’s internal control over financial reporting, both of which were conducted by the management as of December 31st 2010 are captured within item 9.
Part III comprises of five items that is, items 10-14. Items 10, 11 and 12 are notes explaining that one can obtain information about the company’s board of directors and executive officers, ownership of securities by certain beneficial owners and the management of the company as well as information related to the compensation of executives from the Proxy Statement prepared for the annual stakeholder’s meeting. Details of items 13 titled “Certain relationships and related transactions as well as director independence” and 14 titled “Principal accounting fees and services” have not been incorporated into the annual report but can be found in the 2011 Proxy Statement. Readers are thus referred to the proxy statement for more details (Netflix, Inc., 2010, p.40).
Part IV comprises of attached documents which include the company’s financial statements, financial statement schedules and exhibits for the fiscal year 2010.
2. Discuss the key factors that influenced the company's financial performance during the year.
Netflix financial performance for the year ended as of 31st December 2010 was influenced by a host of factors. An increase in the total number of subscribers from 12,268,000 in 2009 to 20,010,000 by the end of 2010 led to an increase in the total amount of revenues collected as well as influenced the total amount of the company’s expenses (Hastings, 2010). The increase in revenues was partially offset by the company’s lowered price plans, an offer through which the company reduced the amount of revenue collected from each paying subscriber by 8.3%. The increase in the total number of paying subscribers also prompted a $78.7 million increase in content delivery expenses so as to cater for the increased demand for DVDs and streamed content. The hiring of more personnel to cater for the increased number of subscribers as well as to provide the necessary support for the higher volumes of content delivery coupled with a $20.0 million in credit card fees, also driven by the growth in number of paying subscribers led to an increase of $33.4 million in fulfillment expenses.
Increased investments in streaming content contributed to an increase in subscription costs particularly through payments made for content acquisition coupled with licensing expenses by $ 165.9 million from those recorded in the previous year. The company’s lower priced plans significantly influenced subscriber choices leading to an increased preference for streamed content and a 22.3% decrease in the number of monthly DVD rentals ordered per average paying subscriber. This had a net effect of increasing the gross margin by 1.8% because the decrease in DVD usage was more than the 8.3% decrease in average revenue per each paying subscriber. Increased investments in streaming content however partially offset the increase in gross margin (Netflix, Inc., 2010, pp.22-34).
3. Discuss the primary assets held by the company.
Netflix as a company holds both current and non-current assets. The current assets held by the company as of December 31st 2010 included cash and cash equivalents amounting to $194,499,000, short-term investments amounting to $155,888,000, current content library worth $181,006,000, pre-paid DVD and streaming content worth $62,217,000 and other current assets worth $ 47,357,000. Non-current assets owned by the company as of 31st December 2010 included content library whose net worth was $180,973,000, properties and equipment worth $128,570,000, deferred tax assets worth $17,467,000 and other non-current assets whose worth amounts to $14,090,000. The total worth of all assets held by the company therefore was $982,067,000 (Netflix, Inc., 2010, p.21).
4. Explain how management characterizes the internal control environment of the company.
The management after careful evaluation characterized the company’s internal control environment as being effective with particular reference to the company’s disclosure controls and procedures as well as internal control over financial reporting as of the 31st of December 2010. However, it also noted that due to the limitations that tend to be inherent in all control systems, the aforementioned evaluations did not in themselves provide absolute guarantees that all instances of fraud or control issues within Netflix if any had been detected (Audit Committee of the Board of Directors, 2010, p.47).
References
Board of Directors (2010). Netflix 2011 proxy statement. Retrieved from http://ir.netflix.com/annuals.cfm
Hastings. R. (2010). Netflix Q3 FY 2010 Earnings. Retrieved from http://ir.netflix.com/annuals.cfm
Netflix, Inc. (2010). 2010 annual report. Retrieved from http://ir.netflix.com/sec.cfm.
