Netflix, Inc. Client Report Danger Zone Consulting

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Netflix, Inc. Client Report Danger Zone Consulting Netflix, Inc. Client Report Danger Zone Consulting Jonathan Lew Travis Patrick Bowers John Weiss Professor Likens Senior Seminar Table of Contents Executive Summary….……………………………………………………………………………3 Company History & General Information…...……………………………………...…………….4 Financial Analysis…………………………………………………………………………………6 Overview………………………....……………………………………………………………..6 Revenue and Profitability………………………………………………………………………7 Balance Sheet Analysis…………………………………………………………………………8 Cash and Liquidity…………………………………………………………………………...…9 Stock Performance and Valuation…..……………………......…………..…………………...10 5 Forces Analysis…………………………………………………………...……………………13 Intensity of Existing Competition...…………………………………………………………...13 Threat of New Entrants………………………………………………………………………..13 Threat of Substitute Products………………………………………………………………….14 Bargaining Power of Suppliers………………………………………………………………..15 Bargaining Power of Consumers………………..…………………………………………….16 SWOT Analysis………………………………………………………………………………….17 Strengths………………………………………………………………………………………17 Weaknesses……………………………………………………………………………………18 Opportunities…………………………………………………………………………………..19 Threats…………………………………………………………………………………………20 Strategic Recommendations……………………………………………………………………...22 2 Executive Summary Netflix brought on DangerZone Consulting to advise on an expansion strategy that would be the most impactful and reap the most results in the uncertain, convoluted online entertainment streaming industry. To do so, DangerZone Consulting first conducted a financial analysis of Netflix for the fiscal year 2013, gauging stock performance, profitability, and overall financial health. DangerZone also assessed the state of the online entertainment streaming industry as well as its future direction, investigating both threats and opportunities. DangerZone has determined that the financial strength of Netflix and the shifts in the industry present a host of opportunities to reinforce Netflix’s position as the market leader and continue to grow exponentially. DangerZone has developed a set of actionable proposals for your consideration. Our strategic recommendations for Netflix focus on strengthening the core business, increasing the number of subscribers and targeted global expansion. Netflix must focus on vertical and horizontal integration, which means creating more original content under the Netflix name and bundling with other home entertainment systems in a bid to attract more subscribers. The company should also update their catalog to make sure it contains the latest movies and TV shows as a common complaint about Netflix is its dated catalog. Lastly, we draw from the lessons of your Latin American expansion to form a set of conditions for countries which Netflix would thrive in. We feel that countries within the European Union (EU) and India might be two good places to expand internationally, as these regions have the infrastructure, economic and political climate to support the introduction of Netflix. 3 Company History and General Information Netflix is a provider of on-demand internet streaming media available to viewers in North and South America, the Caribbean, and parts of Europe. Netflix occupies a unique place in the media industry - aggregating, distributing, and recently creating its own content through an online platform that lets viewer choose when and where they want to watch television shows or movies. Subscribers pay US $7.99 per month for this right1. Its disruptive business model has proven popular among younger users, whose lives are increasingly spent on their personal computers. Netflix began as an online DVD mail order company, allowing customers to select DVD titles online and receive them via Permit Reply Mail. Netflix has since moved on to providing on- demand Internet streaming entertainment across a wide variety of genres, though it still maintains its DVD rental business. Netflix, Inc. was established in 1997 by founders Marc Randolph and Reed Hastings (present CEO) who had previously worked together, and its headquarters are at Los Gatos, California. The Netflix website was launched on August 29th 1997 with only 30 employees and 925 titles available for rent, with a per-title rental cost model. It moved to a monthly subscription concept in 1999, building its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping and handling fees, or per-title rental fees. Netflix had its IPO on May 29th 2002, selling 5.5 million shares of common stock at US $15 per share. On June 14th 2002, Netflix sold another 825,000 shares at the same rice. Netflix posted its first profit during 2003, earning $6.5 million profit on revenues of $272 million. By 2005, 35,000 film titles were available and Netflix shipped close to 1 million DVDs every day. It had developed an extensive personalized video-recommendation system based on 1 Note: As of April 22th 2014, CEO Reed Hastings has announced plans to increase subscription fees by $1 or $2. 4 reviews and ratings by customers, and currently uses the same algorithm in predicting customers’ preferences. In February 2007, the company delivered its billionth DVD and began to move towards Video- on-Demand via internet streaming, which it saw as the future of media and entertainment. DVD sales fell from 2006 to 2011. By 2010, Netflix’s streaming business had grown to the extent that the company shifted from being the fastest-growing customer of the USPS’s first-class mail service to the biggest source of internet traffic in North America in the evening. On September 18th, 2011 Netflix revealed plans to split off their DVD-rental section and rename it Qwikster, where users would have to use a separate website to access Qwikster. This received a negative reaction from many customers, and Reed Hastings quickly announced the cancellation of the planned Qwikster service on October 10th of the same year. Netflix has exclusive pay-TV deals with major and mini-major movie studios. Select titles from Relativity Media, DreamWorks Animation, Open Road Films, FilmDistrict, The Weinstein Company and Walt Disney Studios Motion Pictures are only available through Netflix. Other studios providing content on Netflix under license include Disney–ABC Television Group, DreamWorks Classics, Kino International, Warner Bros. Television, 20th Television, Hasbro Studios, Saban Brands and CBS Television Distribution. In 2013, Netflix was the first company to acquire and release original content for its subscription streaming service with the political drama House of Cards, which debuted in February 2013. This was a landmark event because all 13 episodes of the drama were released at the same time, reinforcing the notion that the average American TV viewer was inclined to “binge-watch” episodes, as opposed to the traditional weekly release of a single episode. Currently, Netflix has ten original series in its library, with Emmy and Academy Awards nominations and wins for many of its series. As of 2014, Netflix reported 33.1 million US subscribers, and around 44 million globally. 5 Financial Analysis Overview Selected Valuation Metrics Netflix, Inc. Market Capitalization 19.54B Trailing P/E 176.50 Forward P/E (Dec 31, 2015) 43.91 Price/Book 14.96 Current Ratio 1.42 Debt/Equity 39.79 EPS 1.85 Beta 2.02 EBITDA 276.72M ROE 10.82% ROA 3.04% Profit Margin 2.57% As of April 14th 2014 Netflix’s financials reflect a strong, profitable company in a booming industry. Netflix has proved its staying power in the industry and can be considered the market leader in the online streaming media entertainment industry. As of April 14th 2014, Netflix trades at $326.71 and has a market cap of $19.54 billion. The company’s IPO in 2002 saw shares sell for $15, which shows how much Netflix has grown since and the optimism and faith of investors and analysts in the company and its management. Netflix has a lot of cash on hand and healthy cash flows to support its expansion. The only concern is the high P/E valuation, but this is typical of tech companies. Netflix has experienced another strong fiscal year and continued an upward trend in financial growth. The company has continued to see revenues rise at remarkable rates over the past 5 years, at an average growth rate of nearly 32% per year. This seemingly unsustainable growth can be attributed to the expansion of the Netflix streaming user base. Over the same time period, Netflix has seen its user subscriptions increase from 12.3 million to over 44 million members. Most of this increase has been domestic, but Netflix now reaches approximately 10 million members internationally. 6 Fifteen years ago there was no such thing as online TV. The online streaming industry is young and Netflix is its trailblazer. In terms of competitors, Amazon’s subdivision Amazon Prime provides the same streaming service of shows and movies. However, any financial comparison between Netflix and Amazon Prime would prove challenging, as separating Amazon Prime from Amazon in the financials is difficult. In reality, Netflix’s biggest competitor are illegal streaming sites that allow users to download media content for free. Overall, analyzing Netflix’s financials alone provides enough evidence for Netflix’s financial health. Revenue and Profitability Source: Netflix Annual Report, 2013 Netflix finished strong, posting net gains of earnings in both Q4 and the fiscal year of 2013. By seeing an increase in online subscriptions of nearly 4 million members, Netflix continued its growth and posted fourth quarter earnings of nearly $1.175 billion;
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