Netflix annual report for the year 2012 (Netflix, 2012) is divided into four parts which cover different sections. The first part covers sections such as business, risk factors, properties, and legal proceedings. In other words, this part provides introduction to the company and its operations including strengths as well as the risk factors that may adversely affect its performance. It also informs the readers of the legal proceedings that are still in process and add uncertainty to the company’s future. The second part covers most of the sections with quantitative data such as financial statements, management commentary, and additional notes that may help the reader better understand the financial statements. The third part mostly covers sections regarding company’s management including board of directors and management compensation policies. The fourth part is merely an exhibit which provides timeline of some important events during the fiscal year.
One factor that significantly shaped company’s financial performance was a huge rise in cost of revenues which jumped from approximately $20.4 million in the fiscal year 2011 to approximately $26.3 million in the fiscal year 2012. This may probably be due to expensive licensing deals with content providers or even shipping costs. The result was a huge decline in operating income from approximately $376 million in the fiscal year to 2011 to only approximately 50 million in the fiscal year 2012. The other factor that had a significant impact on the company’s financial performance was purchases of short-term investments which were more than twice the figure in the previous year and had the outcome of significantly reducing company’s cash reserves and negatively hurting its operating liquidity. It is apparent that Netflix has been facing intense competition and the company’s management indeed notes it in the annual report when it states that Netflix doesn’t only face competition of DVD or movie content providers but also other media content providers including but not limited to free TV Everywhere applications, on-demand content, cable and satellite services, Internet movie and TV content providers, and entertainment video retailers.
The primary assets held by Netflix include current content library and non-current content library at approximately $1.37 billion and $1.51 billion, respectively. This is not surprising given the business of the company. The other major asset held by the company is short-term investments such as marketable securities which increased from approximately $290 million in the fiscal year 2011 to approximately $458 million in the fiscal year 2012. The benefit of marketable securities is that they provided some income while can also be quickly liquidated if needed. The increase in short term investments may also describe some of the decline in the company’s cash and cash equivalents which decline from approximately $508 million in the fiscal year 2011 to approximately $290 million in the fiscal year 2012. The company’s primary assets also include property and equipment such as leased buildings which almost remained stable in 2012 at approximately $131.7 million as compared to 2011’s $136.4 million.
The company’s management claims that it considers its internal control environment effective and has assessed it using COSO’s Internal Control-Integrated Framework. The management also reminds that the same conclusion has been reached by its independent auditor Ernst & Young, LLP as well. In addition, the company’s internal control environment remained unchanged during the fiscal year 2012 as compared to the fiscal year 2011. But the company does remind the investors that management doesn’t consider its internal control system foolproof because no internal control system can provide that guarantee, no matter how well-designed it may be.
Netflix. (2012). Form 10-K. Delaware: Netflix, Inc.