Netflix, Inc: Equity, Cash Flow, and Notes Analysis


TEAM A:


ACC529 Accounting for Managerial Decision Making


July 7, 2004



ABSTRACT


In the following paper, the authors select Netflix Inc, a publicly traded company, and analyze the firm’s year-end financial reports in order to explain the components, and discuss the meaning, impact, and potential strategies brought to light by the reports. Particular attention is paid to the Statement of Cash Flows and the Statement of Owner’s Equity, but a brief mention of the other financial data is presented as well.



Netflix, Inc: Equity, Cash Flow, and Notes Analysis

Introduction
Netflix achieved profitability for the first time in 2003. The Company recorded revenues of $272.2 million, up 78 percent compared with $152.8 million for 2002. Net income was $6.5 million, compared with a net loss of $20.9 million in the prior year. This strong financial performance was driven, in part, by their rapidly increasing subscriber base, which grew to nearly 1.5 million members, up 74 percent over 2002.


Netflix has succeeded in becoming a truly integral part of the consumer entertainment landscape. At year-end 2003, Netflix had approximately 95 percent of the fast-growing market for online DVD movie rentals.


Customer satisfaction is high, because they have the movies that our subscribers want. The Netflix model is based on giving today’s movie consumers a combination of convenience, value and selection that appeals to a broad and diverse group of people — not just avid movie fans.





Statement of Changes in Owner’s Equity Statement


(Please see Exhibit 1 on the following page.)


Components of the Report


Netflix Inc has chosen more of a spreadsheet format for the presentation of their Statement of Owner’s Equity (hereafter “OE”) and Comprehensive Income. This form keeps a running total of the OE from one year to the next, and details the actions taken by the firm that have had an impact on the total amount. The components of note in the





Exhibit 1 – (Netflix, 2004)





Statements are of course the net income from the year’s operations, additional paid-in capital, and those monies earned through the issuance and sale of the firm’s common stock.

Analysis and Strategy
The Statement of OE paints a picture of very positive trend in the accumulation of OE on behalf of the shareholders. For the second year in a row, the statement shows a positive amount of equity, having grown by 126% from the previous year (end of year 2002). The statement also shows that 2003 was the first year in which the company posted a net sales profit for the year. As opposed to the %36 Loss on Equity calculated from the balance and income statements from 2002, we see that in 2003 we can calculate a positive Return on Equity (hereafter “ROE”) to be:


Total OE, December 31, 2002: 89,356,000


Total OE, December 31, 2003: 112,708,000


Net Income, December 31, 2003: 6,512,000


ROE = 6,512,000 / ((89,356,000+112,708,000)/2)


ROE = 6%





The statement also shows that most of the increase in OE for the year of 2003 occurred due to the actions taken with regard to common stock, selling well above the stated par value of $.001, the greatest gains for OE were made regarding the amounts contributed above and beyond that par value, known as Additional Paid-In Capital. Such a positive accumulation of such capital reflects that investors look favorably upon the future of the firm and its potential to make the shareholders money in the future. They must be attuned to the positive trend in profitability and ROE.


The best counsel we can give with regard to strategies uncovered by the financial data presented in the Statement of OE is that continued growth of ROE and Net Comprehensive Profit will further boost investor interest and confidence in Netflix Inc, leading to increased financing activity, or Paid-In Capital, which together with greater retained earnings will afford the firm the assets its needs to appropriately balance the operational and investment actions needed to nourish and grow the organization. The firm may want to consider in 2004 the payment of dividends for the first time in it’s’ history. While the amount of the dividends should be minimal, their mere existence may highlight the increased ROE and Net Profit, further convincing the shareholders that their wealth is increasing and that Netflix is a company in