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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 001-35727
 
Netflix, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
77-0467272
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
 
 
100 Winchester Circle,
Los Gatos,
California
95032
(Address of principal executive offices)
(Zip Code)
(408) 540-3700
(Registrant’s telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share
NFLX
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  
As of September 30, 2020, there were 441,795,008 shares of the registrant’s common stock, par value $0.001, outstanding.



Table of Contents
 


2



NETFLIX, INC.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Revenues
$
6,435,637

 
$
5,244,905

 
$
18,351,614

 
$
14,689,013

Cost of revenues
3,867,751

 
3,097,919

 
11,111,159

 
8,974,190

Marketing
527,597

 
553,797

 
1,465,797

 
1,773,525

Technology and development
453,802

 
379,776

 
1,342,664

 
1,135,773

General and administrative
271,624

 
233,174

 
800,947

 
659,783

Operating income
1,314,863

 
980,239

 
3,631,047

 
2,145,742

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(197,079
)
 
(160,660
)
 
(570,313
)
 
(448,222
)
Interest and other income (expense)
(256,324
)
 
192,744

 
(367,802
)
 
215,378

Income before income taxes
861,460

 
1,012,323

 
2,692,932

 
1,912,898

Provision for income taxes
71,484

 
347,079

 
473,693

 
632,952

Net income
$
789,976

 
$
665,244

 
$
2,219,239

 
$
1,279,946

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.79

 
$
1.52

 
$
5.04

 
$
2.93

Diluted
$
1.74

 
$
1.47

 
$
4.89

 
$
2.83

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
441,526

 
438,090

 
440,486

 
437,547

Diluted
455,088

 
451,552

 
453,846

 
451,896











See accompanying notes to the consolidated financial statements.

3


NETFLIX, INC.
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Net income
$
789,976

 
$
665,244

 
$
2,219,239

 
$
1,279,946

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments 
32,925

 
(20,894
)
 
22,374

 
(21,664
)
Comprehensive income
$
822,901

 
$
644,350

 
$
2,241,613

 
$
1,258,282

























See accompanying notes to the consolidated financial statements.

4


NETFLIX, INC.

Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
   
Three Months Ended
 
Nine Months Ended
   
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
789,976

 
$
665,244

 
$
2,219,239

 
$
1,279,946

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Additions to content assets
(2,653,886
)
 
(3,648,292
)
 
(8,458,943
)
 
(9,971,141
)
Change in content liabilities
(379,458
)
 
(95,548
)
 
(228,945
)
 
(122,660
)
Amortization of content assets
2,733,743

 
2,279,977

 
7,824,287

 
6,636,578

Depreciation and amortization of property, equipment and intangibles
28,589

 
26,704

 
83,767

 
75,761

Stock-based compensation expense
106,357

 
100,262

 
307,586

 
305,310

Other non-cash items
83,851

 
57,934

 
219,600

 
164,337

Foreign currency remeasurement loss (gain) on debt
249,194

 
(171,360
)
 
275,295

 
(167,676
)
Deferred taxes
(40,277
)
 
52,105

 
229,650

 
94,251

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Other current assets
(22,974
)
 
145

 
(147,261
)
 
(56,162
)
Accounts payable
111,677

 
(7,643
)
 
(149,503
)
 
(134,784
)
Accrued expenses and other liabilities
266,027

 
260,872

 
374,768

 
391,814

Deferred revenue
10,941

 
22,729

 
115,457

 
154,607

Other non-current assets and liabilities
(19,999
)
 
(44,923
)
 
(100,248
)
 
(75,528
)
Net cash provided by (used in) operating activities
1,263,761

 
(501,794
)
 
2,564,749

 
(1,425,347
)
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property and equipment
(109,811
)
 
(45,333
)
 
(349,567
)
 
(145,298
)
Change in other assets
(8,840
)
 
(4,021
)
 
(9,388
)
 
(34,195
)
Net cash used in investing activities
(118,651
)
 
(49,354
)
 
(358,955
)
 
(179,493
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of debt

 

 
1,009,464

 
2,243,196

Debt issuance costs

 

 
(7,559
)
 
(18,192
)
Proceeds from issuance of common stock
68,665

 
11,989

 
201,419

 
56,857

Net cash provided by financing activities
68,665

 
11,989

 
1,203,324

 
2,281,861

Effect of exchange rate changes on cash, cash equivalents and restricted cash
28,459

 
(29,325
)
 
(30,624
)
 
(29,341
)
Net increase (decrease) in cash, cash equivalents and restricted cash
1,242,234

 
(568,484
)
 
3,378,494

 
647,680

Cash, cash equivalents and restricted cash at beginning of period
7,180,046

 
5,028,205

 
5,043,786

 
3,812,041

Cash, cash equivalents and restricted cash at end of period
$
8,422,280

 
$
4,459,721

 
$
8,422,280

 
$
4,459,721

See accompanying notes to the consolidated financial statements.

5


NETFLIX, INC.
Consolidated Balance Sheets
(in thousands, except share and par value data)

 
As of
   
September 30,
2020
 
December 31,
2019
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,392,391

 
$
5,018,437

Other current assets
1,434,089

 
1,160,067

Total current assets
9,826,480

 
6,178,504

Content assets, net
25,067,633

 
24,504,567

Property and equipment, net
828,118

 
565,221

Other non-current assets
2,900,312

 
2,727,420

Total assets
$
38,622,543

 
$
33,975,712

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
4,599,654

 
$
4,413,561

Accounts payable
541,298

 
674,347

Accrued expenses and other liabilities
1,259,124

 
843,043

Deferred revenue
1,040,202

 
924,745

Short-term debt
499,517

 

Total current liabilities
7,939,795

 
6,855,696

Non-current content liabilities
2,926,574

 
3,334,323

Long-term debt
15,547,616

 
14,759,260

Other non-current liabilities
1,875,235

 
1,444,276

Total liabilities
28,289,220

 
26,393,555

Commitments and contingencies (Note 7)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 4,990,000,000 shares authorized at September 30, 2020 and December 31, 2019; 441,795,008 and 438,806,649 issued and outstanding at September 30, 2020 and December 31, 2019, respectively
3,303,482

 
2,793,929

Accumulated other comprehensive loss
(1,147
)
 
(23,521
)
Retained earnings
7,030,988

 
4,811,749

Total stockholders’ equity
10,333,323

 
7,582,157

Total liabilities and stockholders’ equity
$
38,622,543

 
$
33,975,712





See accompanying notes to the consolidated financial statements.

6


NETFLIX, INC.
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Total stockholders' equity, beginning balances
 
$
9,334,753

 
$
6,105,548

 
$
7,582,157

 
$
5,238,765

 
 
 
 
 
 
 
 
 
Common stock and additional paid-in capital:
 
 
 
 
 
 
 
 
Beginning balances
 
$
3,127,813

 
$
2,566,365

 
$
2,793,929

 
$
2,315,988

Issuance of common stock upon exercise of options
 
69,312

 
11,345

 
201,967

 
56,674

Stock-based compensation expense
 
106,357

 
100,262

 
307,586

 
305,310

Ending balance
 
$
3,303,482

 
$
2,677,972

 
$
3,303,482

 
$
2,677,972

 
 


 


 
 
 
 
Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Beginning balances
 
$
(34,072
)
 
$
(20,352
)
 
$
(23,521
)
 
$
(19,582
)
Other comprehensive income (loss)
 
32,925

 
(20,894
)
 
22,374

 
(21,664
)
Ending balance
 
$
(1,147
)
 
$
(41,246
)
 
$
(1,147
)
 
$
(41,246
)
 
 
 
 
 
 
 
 
 
Retained earnings:
 
 
 
 
 
 
 
 
Beginning balances
 
$
6,241,012

 
$
3,559,535

 
$
4,811,749

 
$
2,942,359

Net income
 
789,976

 
665,244

 
2,219,239

 
1,279,946

Adoption of ASU 2016-02, Leases (Topic 842)
 

 

 

 
2,474

Ending balances
 
$
7,030,988

 
$
4,224,779

 
$
7,030,988

 
$
4,224,779

 
 
 
 
 
 
 
 
 
Total stockholders' equity, ending balances
 
$
10,333,323

 
$
6,861,505

 
$
10,333,323

 
$
6,861,505
























See accompanying notes to the consolidated financial statements.


7


NETFLIX, INC.
Notes to Consolidated Financial Statements
(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim consolidated financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on January 29, 2020. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the content asset amortization policy and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.
The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of the results for a full year.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in prior GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The Company adopted ASU 2016-13 in the first quarter of 2020 and the impact of the adoption was not material to the Company's consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the coronavirus (COVID-19) pandemic on expected credit losses.


2. Revenue Recognition
The Company's primary source of revenues is from monthly membership fees. Members are billed in advance of the start of their monthly membership and revenues are recognized ratably over each monthly membership period. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities. The Company is the principal in all its relationships where partners, including consumer electronics (“CE”) manufacturers, multichannel video programming distributors (“MVPDs”), mobile operators and internet service providers (“ISPs”), provide access to the service as the Company retains control over service delivery to its members. Typically, payments made to the partners, such as for marketing, are expensed, but in the case where the price that the member pays is established by the partners and there is no standalone price for the Netflix service (for instance, in a bundle), these payments are recognized as a reduction of revenues.
The following tables summarize streaming revenue, paid net membership additions, and paid memberships at end of period by region for the three and nine months ended September 30, 2020 and September 30, 2019, respectively:

United States and Canada (UCAN)
 
 
As of/ Three Months Ended
 
As of/ Nine Months Ended
 
 
September 30, 2020
 
September 30, 2019
 
September 30, 2020
 
September 30, 2019
 
 
(in thousands)
Revenues
 
$
2,933,445

 
$
2,621,250

 
$
8,475,891

 
$
7,379,300

Paid net membership additions
 
177

 
613

 
5,419

 
2,357

Paid memberships at end of period (1)
 
73,081

 
67,114

 
73,081

 
67,114



8


Europe, Middle East, and Africa (EMEA)
 
 
As of/ Three Months Ended
 
As of/ Nine Months Ended
 
 
September 30, 2020
 
September 30, 2019
 
September 30, 2020
 
September 30, 2019
 
 
(in thousands)
Revenues
 
$
2,019,083

 
$
1,428,040

 
$
5,635,094

 
$
3,980,506

Paid net membership additions
 
759

 
3,126

 
10,464

 
9,537

Paid memberships at end of period (1)
 
62,242

 
47,355

 
62,242

 
47,355


Latin America (LATAM)
 
 
As of/ Three Months Ended
 
As of/ Nine Months Ended
 
 
September 30, 2020
 
September 30, 2019
 
September 30, 2020
 
September 30, 2019
 
 
(in thousands)
Revenues
 
$
789,384

 
$
741,434

 
$
2,368,205

 
$
2,049,042

Paid net membership additions
 
256

 
1,490

 
4,907

 
3,303

Paid memberships at end of period (1)
 
36,324

 
29,380

 
36,324

 
29,380


Asia-Pacific (APAC)
 
 
As of/ Three Months Ended
 
As of/ Nine Months Ended
 
 
September 30, 2020
 
September 30, 2019
 
September 30, 2020
 
September 30, 2019
 
 
(in thousands)
Revenues
 
$
634,891

 
$
382,304

 
$
1,687,691

 
$
1,051,400

Paid net membership additions
 
1,012

 
1,543

 
7,271

 
3,878

Paid memberships at end of period (1)
 
23,504

 
14,485

 
23,504

 
14,485

(1) A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receive Netflix service following sign-up and a method of payment being provided, and that is not part of a free trial or other promotional offering by the Company to certain new and rejoining members. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations generally become effective at the end of the prepaid membership period. Involuntary cancellations, as a result of a failed method of payment, becomes effective immediately. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company’s internal systems, which utilize industry standard geo-location technology.

Total U.S. revenues, inclusive of DVD revenues not reported in the tables above, were $2.8 billion and $8.0 billion, respectively, for the three and nine months ended September 30, 2020, and $2.5 billion and $7.0 billion, respectively, for the three and nine months ended September 30, 2019. DVD revenues were $59 million and $185 million, respectively, for the three and nine months ended September 30, 2020, and $72 million and $229 million, respectively, for the three and nine months ended September 30, 2019.
Deferred revenue consists of membership fees billed that have not been recognized, as well as gift cards and other prepaid memberships that have not been fully redeemed. As of September 30, 2020, total deferred revenue was $1,040 million, the vast majority of which was related to membership fees billed that are expected to be recognized as revenue within the next month. The remaining deferred revenue balance, which is related to gift cards and other prepaid memberships, will be recognized as revenue over the period of service after redemption, which is expected to occur over the next 12 months. The $115 million increase in deferred revenue as compared to the balance of $925 million for the year ended December 31, 2019 is a result of the increase in membership fees billed due to increased memberships.


9



3. Earnings Per Share

Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
 
(in thousands, except per share data)
Basic earnings per share:
 
 
 
 
 
 
 
Net income
$
789,976

 
$
665,244

 
$
2,219,239

 
$
1,279,946

Shares used in computation:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
441,526

 
438,090

 
440,486

 
437,547

Basic earnings per share
$
1.79

 
$
1.52

 
$
5.04

 
$
2.93

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net income
$
789,976

 
$
665,244

 
$
2,219,239

 
$
1,279,946

Shares used in computation:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
441,526

 
438,090

 
440,486

 
437,547

Employee stock options
13,562

 
13,462

 
13,360

 
14,349

Weighted-average number of shares
455,088

 
451,552

 
453,846

 
451,896

Diluted earnings per share
$
1.74

 
$
1.47

 
$
4.89

 
$
2.83



Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
 
(in thousands)
Employee stock options
124

 
2,402

 
560

 
1,268


 

10


4. Cash, Cash Equivalents and Restricted Cash

The following tables summarize the Company's cash, cash equivalents, and restricted cash as of September 30, 2020 and December 31, 2019:

 
As of September 30, 2020
 
Cash and cash equivalents
 
Other Current Assets
 
Non-current Assets
 
Total
 
(in thousands)
Cash
$
2,968,826

 
$
2,761

 
$
26,875

 
$
2,998,462

Level 1 securities:
 
 
 
 
 
 
 
Money market funds
5,123,565

 

 
253

 
5,123,818

Level 2 securities:
 
 
 
 
 
 
 
Foreign Time Deposits
300,000

 

 

 
300,000

 
 
 
 
 
 
 
 
 
$
8,392,391

 
$
2,761

 
$
27,128

 
$
8,422,280


 
As of December 31, 2019
 
Cash and cash equivalents
 
Other Current Assets
 
Non-current Assets
 
Total
 
(in thousands)
Cash
$
3,103,525

 
$
1,863

 
$
22,161

 
$
3,127,549

Level 1 securities:
 
 
 
 
 
 
 
Money market funds
1,614,912

 

 
1,325

 
1,616,237

Level 2 securities:
 
 
 
 
 
 
 
Foreign Time Deposits
300,000

 

 

 
300,000

 
 
 
 
 
 
 
 
 
$
5,018,437

 
$
1,863

 
$
23,486

 
$
5,043,786


Other current assets include restricted cash for self insurance. Non-current assets include restricted cash related to workers compensation deposits and letter of credit agreements. The fair value of cash equivalents included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
See Note 6 to the consolidated financial statements for further information regarding the fair value of the Company’s senior notes.
There were no material gross realized gains or losses in the three and nine months ended September 30, 2020 and 2019, respectively.


11


5. Balance Sheet Components

Content Assets, Net
Content assets consisted of the following:
 
As of
 
September 30,
2020
 
December 31,
2019
 
(in thousands)
Licensed content, net
$
14,297,143

 
$
14,703,352

 
 
 
 
Produced content, net


 


Released, less amortization
5,186,247

 
4,382,685

In production
4,696,990

 
4,750,664

In development and pre-production
887,253

 
667,866

 
10,770,490

 
9,801,215

 
 
 
 
Total
$
25,067,633

 
$
24,504,567

 
 
 
 


As of September 30, 2020, approximately $5,743 million, $3,675 million, and $2,264 million of the $14,297 million unamortized cost of the licensed content is expected to be amortized in each of the next three years.  As of September 30, 2020, approximately $1,894 million, $1,465 million, and $1,025 million of the $5,186 million unamortized cost of the produced content that has been released is expected to be amortized in each of the next three years.
As of September 30, 2020, the amount of accrued participations and residuals was not material.
The following table represents the amortization of content assets:
 
Three Months Ended
 
September 30,
2020
 
September 30,
2019
 
(in thousands)
Licensed content
$
1,885,259

 
$
1,810,757

Produced content
848,484

 
469,220

Total
$
2,733,743

 
$
2,279,977



 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
(in thousands)
Licensed content
$
5,628,499

 
$
5,382,225

Produced content
2,195,788

 
1,254,353

Total
$
7,824,287

 
$
6,636,578



12


Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
 
 
As of
 
 
 
 
September 30,
2020
 
December 31,
2019
 
Estimated Useful Lives
 
 
(in thousands)
 
 
Land
 
$
13,560

 
$
6,125

 
 
Buildings
 
41,894

 
33,141

 
30 years
Leasehold improvements
 
387,172

 
354,999

 
Over life of lease
Furniture and fixtures
 
95,240

 
87,465

 
3-15 years
Information technology
 
264,358

 
243,565

 
3 years
Corporate aircraft
 
110,621

 
108,995

 
8 years
Machinery and equipment
 
44,111

 
46,415

 
3-5 years
Capital work-in-progress
 
345,347

 
100,521

 
 
Property and equipment, gross
 
1,302,303

 
981,226

 
 
Less: Accumulated depreciation
 
(474,185
)
 
(416,005
)
 
 
Property and equipment, net
 
$
828,118

 
$
565,221

 
 



Leases
The Company has entered into operating leases primarily for real estate. These operating leases are included in "Other non-current assets" on the Company's Consolidated Balance Sheets, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Company's Consolidated Balance Sheets.  As of September 30, 2020, total right-of-use assets were approximately $1,939 million and total operating lease liabilities were approximately $2,090 million, of which $237 million and $1,853 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. As of December 31, 2019, total right-of-use assets were approximately $1,532 million and total operating lease liabilities were approximately $1,613 million, of which $190 million and $1,423 million were classified in "Accrued expenses and other liabilities" and "Other non-current liabilities", respectively. The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less. These leases are not recorded on the Company's Consolidated Balance Sheets. All operating lease expense is recognized on a straight-line basis over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's right-of-use assets and related lease liabilities were as follows:
 
Three Months Ended
 
September 30, 2020
 
September 30, 2019
 
(in thousands)
Cash paid for operating lease liabilities
$
70,917

 
$
51,767

Right-of-use assets obtained in exchange for new operating lease obligations
175,901

 
77,549



 
Nine Months Ended
 
September 30, 2020
 
September 30, 2019
 
(in thousands)
Cash paid for operating lease liabilities
$
187,880

 
$
130,740

Right-of-use assets obtained in exchange for new operating lease obligations (1)
592,331

 
1,150,443

(1) In the nine months ended September 30, 2019, the balance includes $743 million for operating leases existing on January 1, 2019. The $592 million in additions in the nine months ended September 30, 2020 primarily relate to the additions of corporate office space.


13


Other Current Assets
Other current assets consisted of the following:
 
 
As of
 
 
September 30,
2020
 
December 31,
2019
 
 
(in thousands)
Trade receivables
 
$
604,789

 
$
454,399

Prepaid expenses
 
209,218

 
180,999

Other
 
620,082

 
524,669

Total other current assets
 
$
1,434,089

 
$
1,160,067




6. Debt
As of September 30, 2020, the Company had aggregate outstanding notes of $16,047 million, net of $111 million of issuance costs, with varying maturities (the "Notes"). Of the outstanding balance, $500 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of December 31, 2019, the Company had aggregate outstanding long-term notes of $14,759 million, net of $114 million of issuance costs. Each of the Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at fixed rates. A portion of the outstanding notes is denominated in foreign currency (comprised of €5,170 million) and is remeasured into U.S. dollars at each balance sheet date (with remeasurement loss totaling $249 million and $275 million, respectively, for the three and nine months ended September 30, 2020).
The following table provides a summary of the Company's outstanding debt and the fair values based on quoted market prices in less active markets as of September 30, 2020 and December 31, 2019:
 
 
Principal Amount at Par
 
 
 
 
Level 2 Fair Value as of
 
 
September 30, 2020
 
December 31, 2019
Issuance Date
 
Maturity
 
September 30, 2020
 
December 31, 2019
 
 
(in millions)
 
 
 
 
(in millions)
5.375% Senior Notes
 
$
500

 
$
500

February 2013
 
February 2021
 
$
507

 
$
518

5.500% Senior Notes
 
700

 
700

February 2015
 
February 2022
 
736

 
744

5.750% Senior Notes
 
400

 
400

February 2014
 
March 2024
 
445

 
444

5.875% Senior Notes
 
800

 
800

February 2015
 
February 2025
 
906

 
896

3.000% Senior Notes (1)
 
551

 

April 2020
 
June 2025
 
575

 

3.625% Senior Notes
 
500

 

April 2020
 
June 2025
 
523

 

4.375% Senior Notes
 
1,000

 
1,000

October 2016
 
November 2026
 
1,092

 
1,026

3.625% Senior Notes (1)
 
1,523

 
1,459

May 2017
 
May 2027
 
1,651

 
1,565

4.875% Senior Notes
 
1,600

 
1,600

October 2017
 
April 2028
 
1,800

 
1,670

5.875% Senior Notes
 
1,900

 
1,900

April 2018
 
November 2028
 
2,269

 
2,111

4.625% Senior Notes (1)
 
1,289

 
1,234

October 2018
 
May 2029
 
1,495

 
1,378

6.375% Senior Notes
 
800

 
800

October 2018
 
May 2029
 
989

 
916

3.875% Senior Notes (1)
 
1,406

 
1,346

April 2019
 
November 2029
 
1,556

 
1,429

5.375% Senior Notes
 
900

 
900

April 2019
 
November 2029
 
1,062

 
960

3.625% Senior Notes (1)
 
1,289

 
1,234

October 2019
 
June 2030
 
1,402

 
1,273

4.875% Senior Notes
 
1,000

 
1,000

October 2019
 
June 2030
 
1,142

 
1,019

 
 
$
16,158

 
$
14,873

 
 
 
 
$
18,150

 
$
15,949


(1) The following Senior Notes have a principal amount denominated in euro: 3.000% Senior Notes for €470 million, 3.625% Senior Notes for €1,300 million, 4.625% Senior Notes for €1,100 million, 3.875% Senior Notes for €1,200 million, and 3.625% Senior Notes for €1,100 million.
The expected timing of principal and interest payments for these Notes are as follows:

14


 
As of 
 
September 30,
2020
 
December 31, 2019
 
(in thousands)
Less than one year
$
1,258,639

 
$
736,969

Due after one year and through three years
2,136,439

 
2,581,471

Due after three years and through five years
3,612,818

 
1,705,201

Due after five years
14,875,099

 
15,699,800

Total debt obligations
$
21,882,995

 
$
20,723,441



Each of the Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. The Company may redeem the Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest and an applicable premium. The Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of certain of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. As of September 30, 2020 and December 31, 2019, the Company was in compliance with all related covenants.
Revolving Credit Facility
As of September 30, 2020, the Company has a $750 million unsecured revolving credit facility ("Revolving Credit Agreement") which matures on March 29, 2024. Revolving loans may be borrowed, repaid and reborrowed until March 29, 2024, at which time all amounts borrowed must be repaid. The Company may use the proceeds of future borrowings under the Revolving Credit Agreement for working capital and general corporate purposes. As of September 30, 2020, no amounts have been borrowed under the Revolving Credit Agreement.
The borrowings under the Revolving Credit Agreement bear interest, at the Company’s option, of either (i) a floating rate equal to a base rate (the “Alternate Base Rate”) or (ii) a rate equal to an adjusted London interbank offered rate (the “Adjusted LIBO Rate”), plus a margin of 0.75%. The Alternate Base Rate is defined as the greatest of (A) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate, (B) the federal funds rate, plus 0.500% and (C) the Adjusted LIBO Rate for a one-month interest period, plus 1.00%. The Adjusted LIBO Rate is defined as the London interbank offered rate for deposits in U.S. dollars, for the relevant interest period, adjusted for statutory reserve requirements, but in no event shall the Adjusted LIBO Rate be less than 0.00% per annum. Regulatory authorities that oversee financial markets have announced that after the end of 2021, they would no longer compel banks currently reporting information used to set the LIBO Rate to continue to make rate submissions. As a result, it is possible that beginning in 2022, the LIBO Rate will no longer be available as a reference rate. Under the terms of the Company's Revolving Credit Agreement, in the event of the discontinuance of the LIBO Rate, a mutually agreed-upon alternate benchmark rate will be established to replace the LIBO Rate. The Company and Lenders shall in good faith establish an alternate benchmark rate which places the Lenders and the Company in the same economic position that existed immediately prior to the discontinuation of the LIBO Rate. The Company does not anticipate that the discontinuance of the LIBO Rate will materially impact its liquidity or financial position.
The Company is also obligated to pay a commitment fee on the undrawn amounts of the Revolving Credit Agreement at an annual rate of 0.10%. The Revolving Credit Agreement requires the Company to comply with certain covenants, including covenants that limit or restrict the ability of the Company’s subsidiaries to incur debt and limit or restrict the ability of the Company and its subsidiaries to grant liens and enter into sale and leaseback transactions; and, in the case of the Company or a guarantor, merge, consolidate, liquidate, dissolve or sell, transfer, lease or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole. As of September 30, 2020 and December 31, 2019, the Company was in compliance with all related covenants.


7. Commitments and Contingencies

Content
As of September 30, 2020, the Company had $19.1 billion of obligations comprised of $4.6 billion included in "Current content liabilities" and $2.9 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $11.6 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.

15


As of December 31, 2019, the Company had $19.5 billion of obligations comprised of $4.4 billion included in "Current content liabilities" and $3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $11.8 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition.
The expected timing of payments for these content obligations is as follows:
 
As of 
 
September 30,
2020
 
December 31,
2019
 
(in thousands)
Less than one year
$
8,668,296

 
$
8,477,367

Due after one year and through three years
8,004,624

 
8,352,731

Due after three years and through five years
1,956,565

 
2,041,340

Due after five years
442,769

 
618,644

Total content obligations
$
19,072,254

 
$
19,490,082


Content obligations include amounts related to the acquisition, licensing and production of content. Obligations that are in non-U.S. dollar currencies are translated to the U.S. dollar at period end rates. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements as well as other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time the Company enters into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of such license agreements. The Company does not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant.
Legal Proceedings
From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations.
The Company is involved in litigation matters not listed herein but does not consider the matters to be material either individually or in the aggregate at this time. The Company's view of the matters not listed may change in the future as the litigation and events related thereto unfold.
Indemnification
In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.
The Company's obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.
It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. No amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.


8. Stockholders’ Equity
Stock Option Plan

16


On June 4, 2020, the Company's stockholders approved the 2020 Stock Plan, which was adopted by the Company’s Board of Directors on March 4, 2020 subject to stockholder approval. The 2020 Stock Plan is the successor to the 2011 Stock Plan. The 2020 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. The 2020 Stock plan authorized 17,500,000 new shares to be available for award grants. As of the date the 2020 Stock Plan was adopted by the Company's Board of Directors, 5,530,106 shares were available to be granted under the 2011 Stock Plan. These shares are available for award grants under the 2020 Stock Plan.
A summary of the activities related to the Company’s stock option plans is as follows:
 
 
 
Options Outstanding
 
Shares
Available
for Grant
 
Number of
Shares
 
Weighted-
Average
Exercise Price
(per share)
Balances as of December 31, 2019
6,111,561

 
20,859,326

 
$
124.28

New Shares Authorized
17,500,000

 

 

Granted
(1,498,232
)
 
1,498,232

 
412.45

Exercised

 
(2,988,359
)
 
67.58

Expired

 
(188
)
 
13.38

Balances as of September 30, 2020
22,113,329

 
19,369,011

 
$
155.32

Vested and exercisable as of September 30, 2020
 
 
19,369,011

 
$
155.32



The aggregate intrinsic value of the Company's outstanding stock options as of September 30, 2020 was $6,684 million and represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the third quarter of 2020. This amount changes based on the fair market value of the Company’s common stock. The weighted-average remaining contractual term of the Company's outstanding stock options as of September 30, 2020 included in the table above was 5.47 years.
A summary of the amounts related to option exercises, is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
 
(in thousands)
Total intrinsic value of options exercised
$
321,859

 
$
119,439

 
$
1,067,241

 
$
513,213

Cash received from options exercised
68,665

 
11,989

 
201,419

 
56,857


Stock-based Compensation
Stock options granted are exercisable for the full ten year contractual term regardless of employment status. The following table summarizes the assumptions used to value option grants using the lattice-binomial model and the valuation data:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2020
 
September 30,
2019
 
September 30,
2020
 
September 30,
2019
Dividend yield
%
 
%
 
%
 
%
Expected volatility
45
%
 
38
%
 
37% - 45%

 
38% - 41%

Risk-free interest rate
0.67
%
 
1.92
%
 
0.67% - 1.71%

 
1.92% - 2.74%

Suboptimal exercise factor
3.62

 
3.19

 
3.34 - 3.62

 
3.07 - 3.19

Weighted-average fair value (per share)
$
264

 
$
154

 
$
205

 
$
165

Total stock-based compensation expense (in thousands)
$
106,357

 
$
100,262

 
$
307,586

 
$
305,310

Total income tax impact on provision (in thousands)
$
24,292

 
$
22,679

 
$
68,435

 
$
69,152




17


The Company considers several factors in determining the suboptimal exercise factor, including the historical and estimated option exercise behavior.
The Company calculates expected volatility based solely on implied volatility. The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions, and given consistently high trade volumes of the options, can reasonably be expected to be a better indicator of expected volatility than historical volatility of its common stock.
In valuing shares issued under the Company’s employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.


9. Income Taxes
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2020
 
September 30,
2019
 
September 30, 2020
 
September 30, 2019
 
 
(in thousands, except percentages)
Provision for income taxes
 
$
71,484

 
$
347,079

 
$
473,693

 
$
632,952

Effective tax rate
 
8
%
 
34
%
 
18
%
 
33
%

        
On June 29, 2020, California enacted legislative changes that impose an annual cap of $5 million on the amount of business incentive tax credits the Company can utilize in California effective for tax years 2020 through 2022.
As of September 30, 2020, the Company had a California research and development ("R&D") credit carryforward of $239 million which can be carried forward indefinitely. In the second quarter of 2020 we evaluated the Company’s ability to realize the California R&D credit, the Company considered all available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income and determined it is more likely than not that the pre-2020 credits and a portion of the current year R&D credit would not be realized. In the nine months ended September 30, 2020, the Company has recorded a valuation allowance of $239 million. The Company will monitor its business strategies, weighing positive and negative evidence in assessing its realization of this asset in the future and in the event there is a need to release the valuation allowance, a tax benefit will be recorded.
The effective tax rates for the three and nine months ended September 30, 2020 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, partially offset by the establishment of a valuation allowance on the California R&D credit in the second quarter of 2020. The effective tax rates for the three and nine months ended September 30, 2019 differed from the Federal statutory rate primarily due to changes from the global corporate structure simplification, state taxes, foreign taxes, non-deductible expenses, and the international provisions of U.S. tax reform that became effective in 2018, partially offset by the recognition of excess tax benefits of stock-based compensation, and Federal and California R&D credits.
The decrease in effective tax rates for the three and nine months ended September 30, 2020, as compared to the same period in 2019 was primarily due to the United States Treasury issuance of final regulations that made certain aspects related to the Tax Cuts and Jobs Act of 2017 no longer applicable to the Company and the recognition of excess tax benefits of stock-based compensation, partially offset by the establishment of a valuation allowance on the California R&D credit in the second quarter of 2020. For the three and nine months ended September 30, 2020, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $66 million and $223 million, respectively, compared to the three and nine months ended September 30, 2019 of $27 million and $114 million, respectively.
Gross unrecognized tax benefits were $85 million and $67 million as of September 30, 2020 and December 31, 2019, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $49 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of September 30, 2020, gross unrecognized tax benefits of $24 million were classified as “Other non-current liabilities” and $30 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision for income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision for income taxes” were not material in any of the periods presented.
Deferred tax assets of $429 million and $658 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The Company has a valuation allowance of $371 million and

18


$135 million as of September 30, 2020 and December 31, 2019, respectively. The valuation allowance is related to the California R&D credits and certain foreign tax credits that the Company does not expect to realize.
The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for 2016 through 2018 and is subject to examination for 2019. The 2011 through 2019 state tax returns are subject to examination by various state tax authorities. The Company is also currently under examination in the U.K. for 2018 and 2019. The Company has no other significant foreign jurisdiction audits underway. The years 2014 through 2019 remain subject to examination by foreign tax authorities.
Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.


10. Segment and Geographic Information

The Company operates as one operating segment. The Company's chief operating decision maker ("CODM") is its co-chief executive officers, who review financial information presented on a consolidated basis for the purposes of making operating decisions, assessing financial performance and allocating resources.
On July 13, 2020, Ted Sarandos was appointed as co-Chief Executive Officer of the Company and serves as Chief Content Officer and co-Chief Executive Officer with Reed Hastings, the Company’s co-Chief Executive Officer, President, and Chairman of the Board. The Company determined that both Mr. Sarandos and Mr. Hastings are its CODM and that there have been no changes to the Company's one operating segment as the Company's financial results continue to be evaluated on a consolidated basis by its CODM.
Total U.S. revenues were $2.8 billion and $8.0 billion, respectively, for the three and nine months ended September 30, 2020, and $2.5 billion and $7.0 billion, respectively, for the three and nine months ended September 30, 2019. See Note 2 Revenue Recognition for additional information about streaming revenue by region.
The Company's long-lived tangible assets, as well as the Company's operating lease right-of-use assets recognized on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, were located as follows:
 
As of
 
September 30,
2020
 
December 31, 2019
 
(in thousands)
United States
$
2,111,158

 
$
1,503,459

International
655,795

 
594,047





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; content amortization; impact of recently adopted accounting pronouncements; price changes and testing; dividends; impact of foreign currency and exchange rate fluctuations, including on net income, revenues and average revenues per paying member; deferred revenue; investments in global content, including original content; impact of content and pricing changes on membership growth; the impact of the discontinuance of the LIBO Rate; liquidity, including cash flows from operations, available funds and access to financing sources; net cash provided by (used in) operating activities and free cash flow; unrecognized tax benefits; deferred tax assets; accessing and obtaining additional capital, including use of the debt market; accounting treatment for changes related to content assets; net income; future contractual obligations, including unknown content obligations and timing of payments; membership growth for the remainder of the fiscal year; and the impact of the coronavirus (COVID-19) pandemic and our response to it. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on January 29, 2020, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA, as updated in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. 
We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

19


Investors and others should note that we announce material financial information to our investors using our investor relations website (netflixinvestor.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the United States ("U.S.") social media channels listed on our investor relations website.



Overview
We are the world’s leading subscription streaming entertainment service with over 195 million paid streaming memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials. Additionally, we continue to offer our legacy DVD-by-mail service in the United States.
We are a pioneer in the delivery of streaming entertainment, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy entertainment directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of streaming entertainment.
Our core strategy is to grow our streaming membership business globally within the parameters of our operating margin target. We are continuously improving our members' experience by expanding our content with a focus on a programming mix of content that delights our members and attracts new members. In addition, we are continuously enhancing our user interface and extending our streaming service to more internet-connected screens. Our members can download a selection of titles for offline viewing.
Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet-connected screens and when they tend to increase their viewing. Historically, the first and fourth quarters (October through March) represent our greatest streaming membership growth. In addition, our membership growth can be impacted by our content release schedule and changes to pricing.


Results of Operations

The following represents our consolidated performance highlights:
 
As of/ Three Months Ended
 
Change
 
September 30,
2020
 
September 30,
2019
 
Q3'20 vs. Q3'19
 
(in thousands, except revenue per membership and percentages)
Global Streaming Memberships:
 
 
 
 
 
 
 
Paid net membership additions
2,204

 
6,772

 
(4,568
)
 
(67
)%
Paid memberships at end of period
195,151

 
158,334

 
36,817

 
23
 %
Average paying memberships
194,049

 
154,948

 
39,101

 
25
 %
Average monthly revenue per paying membership
$
10.95

 
$
11.13

 
$
(0.18
)
 
(2
)%
 
 
 
 
 
 
 
 
Financial Results:
 
 
 
 
 
 
 
Streaming revenues
$
6,376,803

 
$
5,173,028

 
$
1,203,775

 
23
 %
DVD revenues
58,834

 
71,877

 
(13,043
)
 
(18
)%
Total revenues
$
6,435,637

 
$
5,244,905

 
$
1,190,732

 
23
 %
 
 
 
 
 
 
 
 
Operating income
$
1,314,863

 
$
980,239

 
$
334,624

 
34
 %
Operating margin
20.4
%
 
18.7
%
 
1.7
%
 
9
 %

Paid net membership additions for the three months ended September 30, 2020 decreased 67% as compared to the three months ended September 30, 2019, in large extent due to the COVID-19 pandemic which contributed to significant paid net membership additions in the first half of 2020, and resulted in less growth in the third quarter of 2020 as compared to the prior year. While we are unable to accurately predict the impact of the pandemic on paid net membership additions in subsequent quarters, we expect less growth for the remainder of 2020 as compared to the prior year.

20


Consolidated revenues for the three months ended September 30, 2020 increased 23% as compared to the three months ended September 30, 2019. The increase in our consolidated revenues was due to the 25% growth in average paying memberships. The growth in paid memberships was partially offset by a 2% decrease in the average monthly revenue per paying membership due to the strengthening of the U.S. dollar relative to certain foreign currencies.
The increase in operating margin is primarily due to increased revenues and decreased marketing costs, coupled with technology and development, and general and administrative costs growing at a slower rate as compared to the 23% increase in revenues. The increase in operating margin was partially offset by increased content expenses as we continue to acquire, license and produce content, including expenses related to the COVID-19 pandemic and expenses related to overall deals.
The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Item 1A: "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 for additional details. In an effort to protect the health and safety of our employees, our workforce has had and continues in most instances to spend a significant amount of time working from home, international travel has been severely curtailed and many of our productions remain paused or continue to experience disruption, as are the productions of our third-party content suppliers. Our other partners have similarly had their operations disrupted, including those partners that we use for our operations as well as development, production, and post-production of content. While we and our partners have resumed productions and related operations in many parts of the world, our ability to produce content remains affected by the pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing. We anticipate that these actions and the global health crisis caused by COVID-19, including any resurgences, will continue to negatively impact business activity across the globe. While we have observed demand increases for our streaming entertainment service in the first half of 2020, we experienced less growth in the third quarter of 2020 and we cannot estimate the impact COVID-19 will have in the future as business and consumer activity decelerates across the globe. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders.  It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, suppliers or vendors, or on our financial results.

Streaming Revenues
We derive revenues from monthly membership fees for services related to streaming content to our members. We offer a variety of streaming membership plans, the price of which varies by country and the features of the plan. As of September 30, 2020, pricing on our plans ranged from the U.S. dollar equivalent of $3 to $24 per month. We expect that from time to time the prices of our membership plans in each country may change and we may test other plan and price variations.
The following tables summarize streaming revenue and other streaming membership information by region for the three and nine months ended September 30, 2020 and September 30, 2019.

United States and Canada (UCAN)
Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
 
 
As of/ Three Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
Q3'20 vs. Q3'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
2,933,445

 
$
2,621,250

 
$
312,195

 
12
 %
Paid net membership additions
 
177

 
613

 
(436
)
 
(71
)%
Paid memberships at end of period
 
73,081

 
67,114

 
5,967

 
9
 %
Average paying memberships
 
72,993

 
66,808

 
6,185

 
9
 %
Average monthly revenue per paying membership
 
$
13.40

 
$
13.08

 
$
0.32

 
2
 %
Constant currency change (1)
 
 
 
 
 
 
 
3
 %

21


Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
 
 
As of/ Nine Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
YTD'20 vs. YTD'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
8,475,891

 
$
7,379,300

 
$
1,096,591

 
15
%
Paid net membership additions
 
5,419

 
2,357

 
3,062

 
130
%
Paid memberships at end of period
 
73,081

 
67,114

 
5,967

 
9
%
Average paying memberships
 
71,082

 
66,357

 
4,725

 
7
%
Average monthly revenue per paying membership
 
$
13.25

 
$
12.36

 
$
0.89

 
7
%
Constant currency change (1)
 
 
 
 
 
 
 
7
%


Europe, Middle East, and Africa (EMEA)
Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
 
 
As of/ Three Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
Q3'20 vs. Q3'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
2,019,083

 
$
1,428,040

 
$
591,043

 
41
 %
Paid net membership additions
 
759

 
3,126

 
(2,367
)
 
(76
)%
Paid memberships at end of period
 
62,242

 
47,355

 
14,887

 
31
 %
Average paying memberships
 
61,863

 
45,792

 
16,071

 
35
 %
Average monthly revenue per paying membership
 
$
10.88

 
$
10.40

 
$
0.48

 
5
 %
Constant currency change (1)
 
 
 
 
 
 
 
3
 %
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
 
 
As of/ Nine Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
YTD'20 vs. YTD'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
5,635,094

 
$
3,980,506

 
$
1,654,588

 
42
%
Paid net membership additions
 
10,464

 
9,537

 
927

 
10
%
Paid memberships at end of period
 
62,242

 
47,355

 
14,887

 
31
%
Average paying memberships
 
59,076

 
43,119

 
15,957

 
37
%
Average monthly revenue per paying membership
 
$
10.60

 
$
10.26

 
$
0.34

 
3
%
Constant currency change (1)
 
 
 
 
 
 
 
5
%

Latin America (LATAM)

22


Three months ended September 30, 2020 as compared to the three months ended September 30, 2019
 
 
As of/ Three Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
Q3'20 vs. Q3'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
789,384

 
$
741,434

 
$
47,950

 
6
 %
Paid net membership additions
 
256

 
1,490

 
(1,234
)
 
(83
)%
Paid memberships at end of period
 
36,324

 
29,380

 
6,944

 
24
 %
Average paying memberships
 
36,196

 
28,635

 
7,561

 
26
 %
Average monthly revenue per paying membership
 
$
7.27

 
$
8.63

 
$
(1.36
)
 
(16
)%
Constant currency change (1)
 
 
 
 
 
 
 
5
 %
Nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019
 
 
As of/ Nine Months Ended
 
Change
 
 
September 30, 2020
 
September 30, 2019
 
YTD'20 vs. YTD'19
 
 
(in thousands, except revenue per membership and percentages)
Revenues
 
$
2,368,205

 
$
2,049,042

 
$