DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
19 July 2016 Americas/United States
Equity Research New Media
Netflix, Inc. (NFLX)
INCREASE TARGET PRICE Rating NEUTRAL [V] Price (18-Jul-16,US$) 98.81 Target price (US$) (from 119.00) 122.00 52-week price range 130.93 - 82.79 Market cap (US$ m) 42,320.20 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix)
Research Analysts Stephen Ju
212 325 8662 stephen.ju@credit-suisse.com
christopher.ford@credit-suisse.com
bo.yang@credit-suisse.com
Higher-Than-Expected Churn, but Gross Adds Remain Stable Event: Netflix reported 2Q16 results with revenue and EPS at $2.11b/$0.09
vs. CS $2.13b/$0.06. Domestic paid streaming subscribers were 46.0m vs. guidance 46.4m and domestic streaming revenue was $1.21b in line with guidance of $1.21b. Int'l paid streaming subscribers were 33.9m vs. guidance 34.29m and Int'l streaming revenue was $758.2m ahead of guidance $754.0m. Our FY16 adj. EPS estimate is now $0.51 vs. prior $0.59.
Investment Case: Citing un-grandfathering in the US, as well as larger International markets, and the upcoming Olympics, Netflix provided lower- than-expected sub growth guidance for Int'l for 3Q16 – that said as it continues to see within-expectations gross adds, this suggests that demand for Netflix's services remains robust and once this period of elevated churn due to price hikes is behind us, it should resume normalized net add growth. Hence, contrary to the guidance of 2Q16, we have not decreased the slope of Int'l growth for 2017 and beyond. This compounded with lower-than- expected content costs drive our price target modestly higher. We remain on the sidelines for now on valuation and maintain our Neutral rating.
Changes to Estimates: Our updated revenue and Adj. EPS projections for FY16 are now $8.88 billion and $0.51 vs. prior $9.04 billion and $0.59.
Valuation: Our updated DCF-derived target, which uses an 11.5% WACC and 3% terminal growth rate is now $122 vs. prior $119.
Share price performance
N FLX.O Q S& P 5 0 0 IN D EX
O ct - 1 5 Jan - 1 6 A p r - 1 6 Ju l - 1 6 8 0
1 0 0
1 2 0
1 4 0
On 18-Jul-2016 the S&P 500 INDEX closed at 2166.89 Daily Jul20, 2015 - Jul18, 2016, 07/20/15 = US$110.55
Quarterly EPS Q1 Q2 Q3 Q4 2015A 0.11 0.10 0.12 0.27 2016E 0.13 0.17 0.12 0.08 2017E 0.39 0.32 0.32 0.36
Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E EPS (Excl. ESO) (US$) 0.60 0.51 1.39 2.84 EPS (CS adj., ) 0.60 0.51 1.39 2.84 Prev. EPS (CS adj., US$) - 0.59 1.83 3.28 P/E (CS adj.) (x) 163.9 195.0 71.3 34.8 P/E rel. (CS adj., %) 919.5 1104.6 459.0 251.4 Revenue (US$ m) 6,779.5 8,877.5 11,753.7 14,111.7 EBITDA (US$ m) 492.8 458.6 1,192.5 2,353.4 Net Debt (US$ m) 61 193 1,099 -351 OCFPS (US$) -1.47 -1.14 -1.79 3.29 P/OCF (x) -77.8 -86.8 -55.1 30.0
Number of shares (m) 428.30 Price/Sales (x) 5.48 BV/share (Next Qtr., US$) 6.9 P/BVPS (x) 16.0 Net debt (Next Qtr., US$ m) 262.3 Dividend (current, US$) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates
19 July 2016
Netflix, Inc. (NFLX) 2
Investment Case Citing un-grandfathering in the US, as well as larger International markets, and the upcoming Olympics, Netflix provided lower-than-expected sub growth guidance for Int'l for 3Q16 – that said as it continues to see within-expectations gross adds, this suggests that demand for Netflix's services remains robust and once this period of elevated churn due to price hikes is behind us, it should resume normalized net add growth.
Hence, contrary to the guidance of 2Q16, we have not decreased the slope of Int'l growth for 2017 and beyond. This compounded with lower-than-expected content costs drive our price target modestly higher to $122 vs. prior $119.
We remain on the sidelines for now on valuation and maintain our Neutral rating. And as we have noted earlier, we will be looking at the following factors to see if a change in our investment stance is warranted:
1. Faster-than-expected realization of target operating margins both domestically and Internationally
2. Acceleration of consumer adoption especially in International markets due to the proliferation of connected devices
3. Greater-than-expected moderation of content spend due to decreased reliance on licensed content in favor of its original programming
3Q16 Guidance and Changes to Estimates Domestic Streaming: Netflix management offered 3Q16 guidance contemplating net addition of 0.3 million domestic streaming customers, with paid subscribers at 46.40 million and total subscribers at 47.43 million. Streaming revenue guidance as a result calls for $1.31 billion:
Figure 1: Netflix, Inc. – Quarterly Paid Domestic Streaming Subscribers and Year Over Year Growth in millions, unless otherwise stated
Figure 2: Netflix, Inc. – Quarterly Domestic Streaming Revenue and Year Over Year Growth USD in millions, unless otherwise stated
36.3 37.7 40.3 41.1 42.1 43.4 45.7 46.0 46.4
21%
25% 24% 23% 22%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
CS estimates for paid Domestic Streaming subscribers and revenue are at 46.4 million and $1.32 billion respectively.
19 July 2016
Netflix, Inc. (NFLX) 3
International Streaming: 3Q16 guidance calls for a net addition of 2.0 million International streaming customers, with paid subscribers at 35.99 million and total subscribers at 38.05 million. International Streaming revenue guidance is $846.0 million.
Figure 3: Netflix, Inc. – Quarterly Paid International Streaming Subscribers and Year Over Year Growth In millions
Figure 4: Netflix, Inc. – Quarterly International Streaming Revenue and Year Over Year Growth US$ in millions
14.4 16.8 19.3 21.6 24.0 27.4 32.0 33.9 36.0
78% 73%
89%
75%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
CS estimates for paid International Streaming subscribers and revenue are at 36.0 million and $848.2 million, respectively.
DVD Segment: Although management does not offer explicit guidance for the DVD segment, our estimates for paid subscribers and revenue are as shown below.
Figure 5: Netflix, Inc. – Quarterly Paid DVD Subscribers and Year Over Year Growth In millions
Figure 6: Netflix, Inc. – Quarterly DVD Revenue and Year Over Year Growth US$ in millions
5.9 5.7 5.5 5.2 5.0 4.8 4.6 4.4 4.2
-16%
-16%
-16%
-15%
-16%
-16%
-16%
-16%
-15%
-16%
-16%
-16%
-16%
-15%
-16%
-17%
-16%
-16%
-16%
-16%
-16%
-15%
-15%
-15%
-15%
-15%
0
20
40
60
80
100
120
140
160
180
200
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We have modeled a continued decrease to 4.2 million subscribers for 3Q16 and revenue as a result at $131.5 million.
19 July 2016
Netflix, Inc. (NFLX) 4
Changes to our 2016 estimates financial and operating metrics are as summarized below:
Figure 7: Netflix, Inc. – Summary Changes to CS 2016 Estimates USD in millions, unless otherwise stated
2016 2016 Prior Current % Δ
Domestic Streaming Revenue 5199.6 5096.4 -2.0% Paid Subscribers (mm) 49.0 47.8 -2.4%
International Streaming Revenue 3305.5 3240.7 -2.0% Paid Subscribers (mm) 41.4 39.9 -3.7%
DVD Revenue 538.7 540.3 0.3% Paid Subscribers 4.0 4.0 0.6%
Revenue 9043.8 8877.5 -1.8% Cost of Revenue 6502.1 6323.2 -2.8% Gross Profit 2541.7 2554.3 0.5% Operating Income 289.9 217.6 Net Income 146.3 100.5 -31.3%
Basic EPS $0.34 $0.23 -31.5% Basic Shares Outstanding 434.6 431.6 -0.7% Diluted EPS $0.33 $0.23 -31.0% Shares Outstanding 444.7 441.6 -0.7%
Adjusted EBITDA 534.9 458.6 -14.3%
Pro Forma Net Income 262.1 223.7 -14.6%
Adjusted EPS - Diluted $0.59 $0.51 -14.1% Source: Company data, Credit Suisse estimates
2Q16 Reported Results Domestic Streaming Results: Netflix reported Domestic Streaming revenue of $1.208 billion versus our $1.22 billion and guidance $1.21 billion as paid subscribers were 46.0 million versus guidance and CS 46.4 million.
Figure 8: Netflix, Inc. - 2Q16 Domestic Streaming Operating Metrics Variance vs CS Estimates USD in millions, unless otherwise stated
2Q16E 2Q16A % Δ Analysis Domestic Streaming Revenue 1219.7 1208.3 -0.9% Versus guidance: $1.21b Contribution Profit 402.4 414.4 3.0% Versus guidance: $403m Paid Subscribers (mm) 46.4 46.0 -0.9% Versus guidance: 46.41m Total Subscribers (mm) 47.5 47.1 -0.8% Versus guidance: 47.47m
Source: Company data, Credit Suisse estimates
Domestic Contribution Profit was $414.4 million versus our $402.4 million and guidance $403 million.
19 July 2016
International Streaming Results: International Streaming revenue was $758.2 million versus our $771.3 million and guidance $754 million. Paid subscribers were 33.9 million versus guidance and CS 34.3 million.
Figure 9: Netflix, Inc. – 2Q16 International Streaming Operating Metrics Variance vs. CS Estimates USD in millions, unless otherwise stated
2Q16E 2Q16A % Δ Analysis International Streaming Revenue 771.3 758.2 -1.7% Versus guidance: $754m Contribution Profit (61.1) (69.2) -13.1% Versus guidance: ($80m) Paid Subscribers (mm) 34.3 33.9 -1.1% Versus guidance: 34.29m Total Subscribers (mm) 36.6 36.0 -1.4% Versus guidance: 36.53m
Source: Company data, Credit Suisse estimates
International Contribution Profit dollars was a loss of ($69.2) million versus our ($61.1) million and guidance ($80) million.
DVD Segment Results: Lastly, Netflix's DVD segment reported $138.7 million in revenue versus our $138.1 million as paid subscribers came in at 4.4 million in line with our 4.4 million.
Figure 10: Netflix, Inc. - 2Q16 DVD Segment Operating Metrics Variance vs CS Estimates USD in millions, unless otherwise stated
2Q16E 2Q16A % Δ Analysis DVD Revenue 138.1 138.7 0.4% Paid Subscribers 4.4 4.4 0.2% Total Subscribers 4.5 4.5 0.5%
Source: Company data, Credit Suisse estimates
Reported Financials: As a result, Netflix's P&L variance versus our estimates are as shown below:
19 July 2016
Netflix, Inc. (NFLX) 6
Figure 11: Netflix, Inc. - 2Q16 Financial Results vs. CS Estimates USD in millions, unless otherwise stated
2Q16E 2Q16A % Δ Analysis Revenue 2129.1 2105.2 -1.1% Subscriber miss in higher churn offset by higher pricing Cost of Revenue 1544.4 1473.1 -4.6% Gross Profit 584.7 632.1 8.1% Marketing 178.4 216.0 21.1% Higher marketing spend on originals and partnerships Technology and Development 217.5 207.3 -4.7% General and Administrative 132.8 138.4 4.2% Other Total Operating Expenses 528.7 561.7 6.2% Operating Income 56.0 70.4 25.8% Interest Expense (33.8) (35.5) -4.8% Interest and Other Income 24.4 16.3 -33.2% Pretax Income 46.5 51.2 10.1% Income Tax Expense (Benefit) 18.1 10.5 -42.3% Net Income 28.4 40.8 43.6%
Basic EPS $0.07 $0.10 44.9% Basic Shares Outstanding 432.4 428.5 -0.9% Diluted EPS $0.06 $0.09 45.1% Shares Outstanding 442.6 438.2 -1.0%
EBITDA Reconciliation Operating Income 56.0 70.4 25.8% Nonrecurring Items 0.0 0.0 N/M Stock-Based Compensation 42.6 44.1 3.6% Pro Forma Operating Income 98.5 114.5 16.2% Depreciation and Amortization 33.2 34.2 2.8% Adjusted EBITDA 113.6 128.6 13.2%
Pro forma Net Income Reconciliation Pro Forma Operating Income 98.5 114.5 16.2% Other Income, Net (9.4) (19.1) -102.9% Pro Forma Pretax Income 89.1 95.3 7.0% GAAP Income Tax Expense (Benefit) 18.1 10.5 -42.3% Total Taxes 34.8 19.5 -43.9% Pro Forma Net Income 54.4 75.8 39.5%
Adjusted EPS - Diluted $0.12 $0.17 41.0%
Source: Company data, Credit Suisse estimates
Valuation In-line with the methodology we have used with the rest of the Internet sector, we have based our 12-month price target on DCF, which suggests $122 versus prior $119. We have used a weighted average cost of capital of 11.5% and a terminal growth rate expectation of 3%.
19 July 2016
Netflix, Inc. (NFLX) 7
Figure 12: Netflix, Inc. -- Discounted Cash Flow Analysis US$ in millions, unless otherwise stated
CAGR 2016E 2017E 2018E 2019E 2020E 2021E '16-'21
EBITDA 458.6 1192.5 2353.4 3930.5 5666.3 7502.0 74.9% Net Income 100.5 523.4 1204.5 2199.9 3352.6 4641.6 115.2% Depreciation & Amortization 5051.9 6249.6 6848.1 7198.3 7417.3 7546.0 8.4% Other Non-Cash Charges (Benefits) 2548.1 3231.2 4057.8 4775.9 5382.3 5892.4 18.3% Interest Expense (Income) 73.9 94.6 95.8 (5.4) (207.2) (533.7) Changes in Operating Assets & Liabilities (8203.1) (10821.2) (10565.2) (10294.5) (10000.4) (9542.0) Unlevered Cash Flows (428.8) (722.3) 1640.9 3874.3 5944.6 8004.3 Capital Expenditures 102.1 89.6 95.1 101.1 108.0 116.3 Unlevered Free Cash Flows (530.8) (812.0) 1545.8 3773.2 5836.6 7888.0 Y/Y % Change 18.0% -53.0% 290.4% 144.1% 54.7% 35.1%
Weighted Average Cost of Capital 11.5% Perpetual UFCF Growth Rate ("G") 3.0%
2016E NPV of Unlevered Free Cash Flows 11059.6 Present Value of Terminal Value 55463.9 Enterprise Value 66523.5 Off-Balance Sheet Assets (12337.8) Adjusted Enterprise Value 54185.7 Year End Net Debt (Cash) 192.5 Equity Value 53993.2 Diluted Shares Outstanding 441.6 Equity Value Per Share $122
Source: Company data, Credit Suisse estimates
Risks to our price target for NFLX shares include the following factors:
Slower-than-expected rate of consumer adoption in any of the launched regions
Faster-than-expected adoption of competitive offerings
As Netflix becomes more global in its reach, the strengthening of the USD versus major currencies can also exert a headwind
19 July 2016
Netflix, Inc. (NFLX) 8
Figure 13: Netflix, Inc. – Quarterly Income Statement USD in millions, unless otherwise stated
1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Domestic Streaming Revenue 984.5 1025.9 1064.0 1105.9 1161.2 1208.3 1315.1 1411.8 1465.7 1508.5 1533.5 1569.4 International Streaming Revenue 415.4 454.8 516.9 566.4 651.7 758.2 848.2 982.6 1161.1 1260.3 1346.4 1464.9 Domestic DVD Revenue 173.2 164.0 157.5 151.0 144.7 138.7 131.5 125.3 119.9 114.4 107.9 101.6 Revenue 1573.1 1644.7 1738.4 1823.3 1957.7 2105.2 2294.9 2519.7 2746.8 2883.2 2987.8 3135.9 Total Cost of Goods Sold 1046.4 1121.8 1174.0 1249.4 1369.5 1473.1 1660.4 1820.2 1894.6 1972.0 2034.6 2097.3 Gross Profit 526.7 522.9 564.4 574.0 588.2 632.1 634.5 699.5 852.1 911.2 953.2 1038.6 Technology and Development 143.1 155.1 171.8 180.9 203.5 207.3 221.4 234.0 241.5 242.5 254.4 262.6 Marketing 194.7 197.1 208.1 224.2 208.0 216.0 202.9 292.6 203.5 298.5 326.9 371.3 General and Administrative 91.5 95.9 110.9 109.0 127.2 138.4 141.5 143.9 142.6 150.2 153.4 155.1 Total Operating Expenses 429.3 448.1 490.8 514.1 538.7 561.7 565.7 670.5 587.6 691.3 734.7 789.0 Operating Income (Loss) 97.5 74.8 73.6 59.9 49.5 70.4 68.8 29.0 264.6 220.0 218.5 249.6 Interest and Other Income (32.3) 0.9 3.9 (3.7) 26.0 16.3 15.1 29.3 30.1 25.3 23.0 21.0 Interest and Other Expense (26.7) (35.2) (35.3) (35.4) (35.5) (35.5) (41.2) (48.5) (48.5) (48.5) (48.5) (48.5) Total Other Income (Expense) (59.0) (34.3) (31.4) (39.2) (9.6) (19.1) (26.0) (19.2) (18.4) (23.2) (25.5) (27.5) Pretax Income 38.4 40.5 42.2 20.7 39.9 51.2 42.7 9.8 246.2 196.7 193.0 222.1 Income Tax Provision (Benefit) 14.7 14.2 12.8 (22.4) 12.2 10.5 16.7 3.8 96.0 76.7 75.3 86.6 Net Income to Common 23.7 26.3 29.4 43.2 27.7 40.8 26.1 6.0 150.2 120.0 117.7 135.5
Basic EPS $0.06 $0.06 $0.07 $0.10 $0.06 $0.10 $0.06 $0.01 $0.34 $0.27 $0.26 $0.30 Shares Outstanding 423.6 425.3 426.9 427.7 428.1 428.5 432.8 437.1 440.4 443.7 447.0 450.4 Diluted EPS $0.05 $0.06 $0.07 $0.10 $0.06 $0.09 $0.06 $0.01 $0.33 $0.26 $0.26 $0.29 Shares Outstanding 433.8 436.1 437.6 438.3 438.0 438.2 443.0 447.3 450.6 453.9 457.2 460.5
EBITDA Reconciliation GAAP Operating Income 97.5 74.8 73.6 59.9 49.5 70.4 68.8 29.0 264.6 220.0 218.5 249.6 Depreciation of PP&E 15.2 15.6 16.0 15.5 14.8 14.1 14.4 14.8 15.2 15.6 16.1 16.6 Amortization of Intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA 112.6 90.4 89.7 75.4 64.3 84.5 83.2 43.8 279.8 235.6 234.6 266.2 Nonrecurring Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Stock Based Compensation 27.4 28.6 32.8 35.9 42.4 44.1 45.9 50.4 41.2 43.2 44.8 47.0 Proforma Operating Income 124.9 103.4 106.5 95.8 91.9 114.5 114.7 79.4 305.8 263.2 263.3 296.6 Amortization of DVD Library 21.2 20.8 18.6 18.8 20.4 20.0 17.4 14.9 8.3 7.9 7.5 7.1 Non-Cash Charges for Equity Granted to Non-Employees 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjusted EBITDA 140.0 119.0 122.5 111.2 106.7 128.6 129.1 94.2 321.0 278.9 279.4 313.2
Adjusted Net Income Reconciliation Pro Forma Operating Income 124.9 103.4 106.5 95.8 91.9 114.5 114.7 79.4 305.8 263.2 263.3 296.6 Interest and Other Income (32.3) 0.9 3.9 (3.7) 26.0 16.3 15.1 29.3 30.1 25.3 23.0 21.0 Interest and Other Expense (26.7) (35.2) (35.3) (35.4) (35.5) (35.5) (41.2) (48.5) (48.5) (48.5) (48.5) (48.5) Pro Forma Pretax Income 65.8 69.1 75.1 56.6 82.3 95.3 88.6 60.2 287.4 240.0 237.8 269.1 GAAP Tax Provision 7.3 14.2 12.8 (22.4) 12.2 10.5 16.7 3.8 96.0 76.7 75.3 86.6 Income Tax Effect of Stock-Based Comp 17.9 10.0 10.0 (38.8) 13.0 9.0 17.9 19.7 16.1 16.9 17.5 18.3 Implied Tax Rate 38.3% 35.0% 30.3% -108.3% 30.6% 20.5% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% Pro Forma Net Income Attributable to Common 48.0 44.9 52.3 117.9 57.1 75.8 54.1 36.7 175.3 146.4 145.1 164.2
Adjusted EPS - Diluted $0.11 $0.10 $0.12 $0.27 $0.13 $0.17 $0.12 $0.08 $0.39 $0.32 $0.32 $0.36
Y/Y % Change Domestic Streaming Revenue 23.3% 4.2% 3.7% 3.9% 17.9% 4.0% 8.8% 7.4% 26.2% 2.9% 1.7% 2.3% International Streaming Revenue 55.5% 9.5% 13.7% 9.6% 56.9% 16.3% 11.9% 15.8% 78.2% 8.5% 6.8% 8.8% Domestic DVD Revenue (15.2)% (5.3)% (4.0)% (4.1)% (16.4)% (4.2)% (5.2)% (4.8)% (17.1)% (4.6)% (5.7)% (5.8)% Revenue 23.9% 4.5% 5.7% 4.9% 24.4% 7.5% 9.0% 9.8% 40.3% 5.0% 3.6% 5.0% Total Cost of Goods Sold 20.4% 7.2% 4.7% 6.4% 30.9% 7.6% 12.7% 9.6% 38.3% 4.1% 3.2% 3.1% Gross Profit 31.4% (0.7)% 7.9% 1.7% 11.7% 7.5% 0.4% 10.2% 44.9% 6.9% 4.6% 9.0% Technology and Development 29.7% 8.4% 10.8% 5.3% 42.2% 1.9% 6.8% 5.7% 18.7% 0.4% 4.9% 3.2% Marketing 42.0% 1.3% 5.6% 7.7% 6.8% 3.9% (6.1)% 44.2% (2.2)% 46.7% 9.5% 13.6% General and Administrative 63.7% 4.8% 15.6% (1.7)% 39.1% 8.8% 2.2% 1.7% 12.1% 5.3% 2.1% 1.1% Operating Income (0.1)% (23.2)% (1.6)% (18.7)% (49.3)% 42.3% (2.3)% (57.8)% 435.0% (16.9)% (0.7)% 14.2% Net Income to Common (55.4)% 11.1% 11.8% 46.7% 16.7% 47.4% (36.1)% (77.0)% 442.9% (20.1)% (1.9)% 15.1% Pro Forma Operating Income 1.2% (17.2)% 2.9% (10.1)% (26.4)% 24.6% 0.2% (30.7)% 232.8% (13.9)% 0.0% 12.7% Adjusted EBITDA 3.1% (15.0)% 3.0% (9.2)% (23.8)% 20.6% 0.4% (27.0)% 200.9% (13.1)% 0.2% 12.1% Pro Forma Net Income Attributable to Common (30.0)% (6.4)% 16.4% 125.3% 18.9% 32.9% (28.7)% (32.0)% 207.1% (16.5)% (0.9)% 13.2%
Margins Gross Margin 33.5% 31.8% 32.5% 31.5% 30.0% 30.0% 27.6% 27.8% 31.0% 31.6% 31.9% 33.1% GAAP Operating Margin 6.2% 4.6% 4.2% 3.3% 2.5% 3.3% 3.0% 1.2% 9.6% 7.6% 7.3% 8.0% Pro Forma Operating Margin 7.9% 6.3% 6.1% 5.3% 4.7% 5.4% 5.0% 3.2% 11.1% 9.1% 8.8% 9.5% Adjusted EBITDA Margin 8.9% 7.2% 7.0% 6.1% 5.4% 6.1% 5.6% 3.7% 11.7% 9.7% 9.4% 10.0% Net Income Margin 1.5% 1.6% 1.7% 2.4% 1.4% 1.9% 1.1% 0.2% 5.5% 4.2% 3.9% 4.3% Adjusted Net Income Margin 3.1% 2.7% 3.0% 6.5% 2.9% 3.6% 2.4% 1.5% 6.4% 5.1% 4.9% 5.2%
2017E2016E2015A
19 July 2016
Netflix, Inc. (NFLX) 9
Figure 14: Netflix, Inc. – Annual Income Statement USD in millions, unless otherwise stated
CAGR 2015A 2016E 2017E 2018E 2019E 2020E 2021E '16-'21
Domestic Streaming Revenue 4180.3 5096.4 6077.1 6671.6 7191.0 7632.6 8007.9 9.5% International Streaming Revenue 1953.4 3240.7 5232.8 7096.3 9140.2 11258.9 13409.4 32.8% Domestic DVD Revenue 645.7 540.3 443.8 343.8 243.7 155.9 89.6 Revenue 6779.5 8877.5 11753.7 14111.7 16574.9 19047.3 21506.8 19.4% Total Cost of Goods Sold 4591.5 6323.2 7998.6 8905.0 9579.3 10127.2 10587.7 10.9% Gross Profit 2188.0 2554.3 3755.1 5206.6 6995.6 8920.1 10919.1 33.7% Technology and Development 650.8 866.2 1001.0 1133.7 1262.3 1386.4 1508.2 11.7% Marketing 824.1 919.5 1200.1 1358.7 1443.4 1509.0 1550.7 11.0% General and Administrative 407.3 551.0 601.3 643.9 688.9 735.9 784.8 7.3% Total Operating Expenses 1882.2 2336.7 2802.5 3136.3 3394.5 3631.2 3843.8 10.5% Operating Income (Loss) 305.8 217.6 952.7 2070.3 3601.1 5288.9 7075.4 100.6% Interest and Other Income (31.2) 86.8 99.5 98.3 199.5 401.3 703.2 Interest and Other Expense (132.7) (160.7) (194.1) (194.1) (194.1) (194.1) (169.5) Total Other Income (Expense) (163.9) (73.9) (94.6) (95.8) 5.4 207.2 533.7 Pretax Income 141.9 143.7 858.0 1974.5 3606.4 5496.0 7609.1 121.2% Income Tax Provision (Benefit) 19.2 43.2 334.6 770.1 1406.5 2143.5 2967.6 Net Income to Common 122.6 100.5 523.4 1204.5 2199.9 3352.6 4641.6 115.2%
Basic EPS $0.29 $0.23 $1.18 $2.62 $4.65 $6.88 $9.25 108.8% Shares Outstanding 425.9 431.6 445.4 458.9 472.8 487.1 501.9 Diluted EPS $0.28 $0.23 $1.15 $2.57 $4.55 $6.74 $9.06 109.0% Shares Outstanding 436.4 441.6 455.5 469.0 483.0 497.3 512.1
EBITDA Reconciliation GAAP Operating Income 305.8 217.6 952.7 2070.3 3601.1 5288.9 7075.4 100.6% Depreciation of PP&E 62.3 58.1 63.5 71.4 80.8 91.7 104.0 12.3% Amortization of Intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA 368.1 275.8 1016.2 2141.8 3681.9 5380.6 7179.4 91.9% Nonrecurring Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Stock Based Compensation 124.7 182.8 176.3 211.7 248.6 285.7 322.6 12.0% Proforma Operating Income 430.5 400.4 1129.0 2282.0 3849.7 5574.6 7398.0 79.2% Amortization of DVD Library 79.4 72.8 30.8 24.3 17.6 11.5 6.8 Non-Cash Charges for Equity Granted to Non-Employees 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjusted EBITDA 492.8 458.6 1192.5 2353.4 3930.5 5666.3 7502.0 74.9%
Adjusted Net Income Reconciliation Pro Forma Operating Income 430.5 400.4 1129.0 2282.0 3849.7 5574.6 7398.0 79.2% Interest and Other Income (31.2) 86.8 99.5 98.3 199.5 401.3 703.2 Interest and Other Expense (132.7) (160.7) (194.1) (194.1) (194.1) (194.1) (169.5) Pro Forma Pretax Income 266.6 326.5 1034.3 2186.2 3855.1 5781.7 7931.7 GAAP Tax Provision 11.8 43.2 334.6 770.1 1406.5 2143.5 2967.6 Income Tax Effect of Stock-Based Comp (1.0) 59.6 68.8 82.6 97.0 111.4 125.8 Implied Tax Rate 4.1% 31.5% 39.0% 39.0% 39.0% 39.0% 39.0% Pro Forma Net Income Attributable to Common 263.1 223.7 630.9 1333.6 2351.6 3526.9 4838.3 84.9%
Adjusted EPS - Diluted $0.60 $0.51 $1.39 $2.84 $4.87 $7.09 $9.45 79.5%
Y/Y % Change Domestic Streaming Revenue 21.8% 21.9% 19.2% 9.8% 7.8% 6.1% 4.9% International Streaming Revenue 49.3% 65.9% 61.5% 35.6% 28.8% 23.2% 19.1% Domestic DVD Revenue (15.6)% (16.3)% (17.9)% (22.5)% (29.1)% (36.0)% (42.5)% Revenue 23.2% 30.9% 32.4% 20.1% 17.5% 14.9% 12.9% Total Cost of Goods Sold 22.3% 37.7% 26.5% 11.3% 7.6% 5.7% 4.5% Gross Profit 24.9% 16.7% 47.0% 38.7% 34.4% 27.5% 22.4% Technology and Development 37.8% 33.1% 15.6% 13.3% 11.3% 9.8% 8.8% Marketing 35.7% 11.6% 30.5% 13.2% 6.2% 4.5% 2.8% General and Administrative 51.0% 35.3% 9.1% 7.1% 7.0% 6.8% 6.6% Operating Income (24.0)% (28.8)% 337.8% 117.3% 73.9% 46.9% 33.8% Net Income to Common (54.0)% (18.1)% 420.9% 130.1% 82.6% 52.4% 38.4% Pro Forma Operating Income (16.9)% (7.0)% 181.9% 102.1% 68.7% 44.8% 32.7% Adjusted EBITDA (13.8)% (6.9)% 160.0% 97.4% 67.0% 44.2% 32.4% Pro Forma Net Income Attributable to Common (6.1)% (15.0)% 182.0% 111.4% 76.3% 50.0% 37.2%
Margins Gross Margin 32.3% 28.8% 31.9% 36.9% 42.2% 46.8% 50.8% GAAP Operating Margin 4.5% 2.5% 8.1% 14.7% 21.7% 27.8% 32.9% Pro Forma Operating Margin 6.4% 4.5% 9.6% 16.2% 23.2% 29.3% 34.4% Adjusted EBITDA Margin 7.3% 5.2% 10.1% 16.7% 23.7% 29.7% 34.9% Net Income Margin 1.8% 1.1% 4.5% 8.5% 13.3% 17.6% 21.6% Adjusted Net Income Margin 3.9% 2.5% 5.4% 9.5% 14.2% 18.5% 22.5%
Source: Company data, Credit Suisse estimates
19 July 2016
Netflix, Inc. (NFLX) 10
Figure 15: Netflix, Inc. – Balance Sheet USD in millions, unless otherwise stated
2015A 2016E 2017E 2018E 2019E 2020E 2021E ASSETS Cash and Equivalents 1809.3 2764.2 1857.8 3308.0 7086.8 13130.8 21552.7 Short-Term Investments 501.4 443.3 443.3 443.3 443.3 443.3 443.3 Prepaid Expenses 0.0 20.1 23.7 26.6 28.8 30.8 32.5 Prepaid Revenue-Sharing Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current Content Library, Net 2906.0 3696.8 5317.7 6246.5 6622.0 6569.4 6069.3 Other Current Assets 215.1 203.4 203.4 203.4 203.4 203.4 203.4 Total Current Assets 5431.8 7127.8 7845.9 10227.9 14384.3 20377.7 28301.3 DVD Library, Net 4312.8 7049.4 10289.9 13351.4 16329.9 19222.8 21976.3 Intangible Assets, Net 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Property and Equipment, Net 173.4 158.5 155.4 156.4 160.8 166.9 173.4 Deposits 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Assets 284.8 300.8 300.8 300.8 300.8 300.8 300.8 Total Assets 10202.9 14636.6 18591.9 24036.5 31175.8 40068.2 50751.8
LIABILITIES & STOCKHOLDERS' EQUITY Accounts Payable 253.5 294.7 346.8 390.3 422.5 451.5 476.7 Content Accounts Payable 2789.0 3921.6 6264.9 9650.8 13862.2 18724.8 24117.3 Accrued Expenses 140.4 221.0 260.1 292.7 316.9 338.6 357.5 Deferred Revenue 346.7 446.2 555.7 661.8 768.6 875.2 980.3 Current Portion of Capital Lease Obligations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Notes Payable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Current Liabilities 3529.6 4883.6 7427.5 10995.6 15370.1 20390.0 25931.9 Long-Term Debt 2371.4 3400.0 3400.0 3400.0 3400.0 3400.0 2900.0 Long-Term Debt Due to Related Party 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Deferred Rent 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capital Lease Obligations, Less Current 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-Current Content Liabilities 2026.4 3240.2 3951.8 4412.0 4728.0 4961.9 5139.3 Other Non-Current Liabilities 52.1 54.2 54.2 54.2 54.2 54.2 54.2 Total Liabilities 7979.4 11578.1 14833.6 18861.8 23552.3 28806.2 34025.4
Stockholders' Equity Common Stock 0.0 0.4 0.5 0.5 0.5 0.5 0.5 Additional Paid-In Capital 1324.8 2053.9 2230.3 2442.2 2691.0 2977.0 3799.8 Deferred Stock-Based Compensation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accumulated Other Comprehensive Income (43.3) (38.2) (38.2) (38.2) (38.2) (38.2) (38.2) Retained Earnings 941.9 1042.4 1565.8 2770.3 4970.2 8322.8 12964.3 Treasury Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Shareholder Equity: 2223.4 3058.5 3758.4 5174.7 7623.5 11262.0 16726.4 Total Liabilities and Shareholder's Equity 10202.9 14636.6 18591.9 24036.5 31175.8 40068.2 50751.8
Source: Company data, Credit Suisse estimates
19 July 2016
Netflix, Inc. (NFLX) 11
Figure 16: Netflix, Inc. – Cash Flow Statement USD in millions, unless otherwise stated
2015A 2016E 2017E 2018E 2019E 2020E 2021E Cash Flows from Operating Activities: Net Income (Loss) 122.6 100.5 523.4 1204.5 2199.9 3352.6 4641.6 Depreciation of Property and Equipment 62.3 58.1 63.5 71.4 80.8 91.7 104.0 Amortization of DVD Library 79.4 72.8 30.8 24.3 17.6 11.5 6.8 Amortization of Streaming Content Library 3405.4 4921.0 6155.3 6752.4 7099.9 7314.1 7435.2 Change in Streaming Content Liabilities 1162.4 2365.2 3054.9 3846.1 4527.3 5096.6 5569.8 Stock-Based Compensation Expense 124.7 182.8 176.3 211.7 248.6 285.7 322.6 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Changes in Operating Assets and Liabilities: Prepaid Content 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Prepaid Expenses and Other Current Assets 0.0 (20.1) (3.6) (3.0) (2.2) (2.0) (1.7) Acquisition of Streaming Content Library (5744.9) (8423.9) (11018.2) (10744.4) (10455.5) (10155.7) (9689.7) Accounts Payable 51.6 43.2 52.1 43.5 32.2 29.0 25.3 Accrued Expenses 48.8 92.3 39.1 32.6 24.2 21.7 19.0 Deferred Revenue 72.1 99.5 109.5 106.1 106.8 106.6 105.2 Deferred Rent and Other (26.5) 5.9 0.0 0.0 0.0 0.0 0.0 Cash Provided by Operating Activities: (641.9) (502.7) (817.0) 1545.1 3879.7 6151.8 8538.0
Cash Flows from Investing Activities: Proceeds from Sale of Short-Term Investments 363.8 114.6 0.0 0.0 0.0 0.0 0.0 Purchase of Short-Term Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Purchases of Property and Equipment (91.2) (44.0) (60.4) (72.5) (85.1) (97.8) (110.5) Acquisitions of DVD Library (78.0) (58.1) (29.3) (22.6) (16.0) (10.2) (5.8) Proceeds from Sale of DVDs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Deposits and Other Assets (1.9) 0.6 0.0 0.0 0.0 0.0 0.0 Cash Provided by Investing Activities (179.2) (40.3) (89.6) (95.1) (101.1) (108.0) (116.3)
Cash Flows from Financing Activities: Proceeds from Issuance of Common Stock 158.5 32.4 0.0 0.0 0.0 0.0 0.0 Principal Payments on Notes Payable and Capital Lease Obligations(0.9) 0.2 0.2 0.2 0.2 0.2 0.2 Repurchases of Common Stock, Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Cash Provided by Financing Activities 1640.3 1532.6 0.2 0.2 0.2 0.2 0.2
Effect of Exchange Rate on Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Increase (Decrease) in Cash and Cash Equivalents 695.7 954.9 (906.4) 1450.2 3778.8 6044.0 8422.0
Cash and Cash Equivalents Beginning of Period 1113.6 1809.3 2764.2 1857.8 3308.0 7086.8 13130.8 Cash and Cash Equivalents End of Period 1809.3 2764.2 1857.8 3308.0 7086.8 13130.8 21552.7
Source: Company data, Credit Suisse estimates
19 July 2016
Companies Mentioned (Price as of 18-Jul-2016) Netflix, Inc. (NFLX.OQ, $98.81, NEUTRAL[V], TP $119.0)
Disclosure Appendix Important Global Disclosures I, Stephen Ju, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Netflix, Inc. (NFLX.OQ)
NFLX.OQ Closing Price Target Price Date (US$) (US$) Rating 23-Jul-13 35.75 33.71 N 22-Oct-13 46.16 49.14 23-Jan-14 55.53 49.86 22-Apr-14 53.27 52.71 22-Jul-14 61.58 61.43 16-Oct-14 51.67 56.29 14-Jan-15 46.32 61.71 21-Jan-15 58.47 59.57 14-Apr-15 68.39 65.86 16-Apr-15 80.29 72.14 10-Jul-15 97.23 100.00 16-Jul-15 115.81 110.00 09-Oct-15 113.33 130.00 15-Oct-15 101.09 124.00 12-Jan-16 116.58 119.00 20-Jan-16 107.74 126.00 18-Apr-16 108.40 127.00 19-Apr-16 94.34 116.00 15-Jul-16 98.39 119.00 * Asterisk signifies initiation or assumption of coverage.
Target Price Closing Price NFLX.OQ
1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16 30
55
80
105
130
155
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
19 July 2016
Netflix, Inc. (NFLX) 13
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Netflix, Inc. (NFLX.OQ)
Method: Our $119 target price for Netflix is calculated using discounted cash flow. We use a 3% terminal growth rate, a 11.5% weighted average cost of capital. We maintain our Neutral stance primarily on valuation and factors which can get us to change our stance include: 1) Faster-than-expected realization of target operating margins both domestically and Internationally, 2) Acceleration of consumer adoption especially in International markets due to the proliferation of connected devices, 3) Moderation of content spends due to traction of its original programming.
Risk: Risks to our $119 target price for Netflix shares include the following factors: 1) Slower-than-expected rate of consumer adoption in any of the launched regions, 2) Faster-than-expected adoption of competitive offerings, 3) As Netflix becomes more global in its reach, the strengthening of the USD versus major currencies can also exert a headwind.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (NFLX.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NFLX.OQ) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (NFLX.OQ). For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=238460&v=-582ahbcuyoyulmfc69vx0g3wh . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC ........................................................................................................................................................Stephen Ju
19 July 2016
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19 July 2016
Netflix, Inc. (NFLX) 15
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Investment Case
Domestic Streaming:
Figure 1: Netflix, Inc. – Quarterly Paid Domestic Streaming Subscribers and Year Over Year Growth
Figure 2: Netflix, Inc. – Quarterly Domestic Streaming Revenue and Year Over Year Growth
International Streaming:
Figure 3: Netflix, Inc. – Quarterly Paid International Streaming Subscribers and Year Over Year Growth
Figure 4: Netflix, Inc. – Quarterly International Streaming Revenue and Year Over Year Growth
DVD Segment:
Figure 5: Netflix, Inc. – Quarterly Paid DVD Subscribers and Year Over Year Growth
Figure 6: Netflix, Inc. – Quarterly DVD Revenue and Year Over Year Growth
Figure 7: Netflix, Inc. – Summary Changes to CS 2016 Estimates
2Q16 Reported Results
Domestic Streaming Results:
Figure 8: Netflix, Inc. - 2Q16 Domestic Streaming Operating Metrics Variance vs CS Estimates
International Streaming Results:
Figure 9: Netflix, Inc. – 2Q16 International Streaming Operating Metrics Variance vs. CS Estimates
DVD Segment Results:
Figure 10: Netflix, Inc. - 2Q16 DVD Segment Operating Metrics Variance vs CS Estimates
Reported Financials:
Figure 11: Netflix, Inc. - 2Q16 Financial Results vs. CS Estimates
Valuation
Figure 13: Netflix, Inc. – Quarterly Income Statement
Figure 14: Netflix, Inc. – Annual Income Statement
Figure 15: Netflix, Inc. – Balance Sheet
Figure 16: Netflix, Inc. – Cash Flow Statement