Netflix’s content streaming obligations grow by US$1.6 billion

Netflix’s content streaming obligations grew by US$1.6 billion in the first nine months of 2014, due to multi-year commitments linked to its latest European launches and the expansion of its original programming efforts.

In its latest quarterly report, filed yesterday with the US Securities and Exchange Commission, Netflix said that its streaming content obligations had grown from US$7.3 billion as of December 31, 2013 to US$8.9billion as of September 30, 2014.

“A streaming content obligation is incurred at the time we enter into an agreement to obtain future titles,” said Netflix, explaining that certain agreements include the obligation to license rights for unknown future titles – “the ultimate quantity and/or fees for which are not yet determinable.”

In its domestic streaming segment, Netflix recorded a US$91.3 million year-on-year increase in domestic streaming cost of revenues in Q3, which it said was primarily due to a US$71.2 million increase in content expenses relating to existing and new streaming content, including more exclusive and original programming.

Streaming delivery expenses increased by US$12.8 million and other costs, such as payment processing fees and customer service call centres, increased $7.3 million due to Netflix’s growing member base, the company said.

In its international segment, Netflix reported a similar US$82.1 million year-on-year increase in cost of revenues for thequarter. It said this was due to a US$66.4 million increase in content expenses and US$15.7 million more in streaming delivery expenses.

“Our primary uses of cash include content acquisition and licensing, streaming delivery, marketing programs and payroll,” said Neflix in the filing.

“We expect to continue to make significant investments in streaming content, including original content. We also expect to significantly increase our investments in international expansion.

“Payment terms for certain content agreements require more upfront cash payments relative to the expense and therefore, future investments could impact our liquidity,” it warned.

Overall, in Q3, Netflix reported that domestic streaming revenues grew 25% year-on-year to US$877 million, while international revenue grew 89% to $346 million – both were in line with forecasts. Net income came in at US$59 million, up from US$32 million for the same quarter last year. However, Netflix added fewer new customers than it had previously predicted.