Netflix Inc. (NASDAQ: NFLX) recently joined the waves and waves of public companies which filed their 10-K annual reports with the SEC.  We often dig through these and other reports to find tidbits that most investors do not take the time find on their own.  Some of these risks and data points are actual risks, while others are just not commonly known points which investors should keep in mind when they are deciding to invest in these companies.

Streaming versus mail… In 2010, Netflix passed a significant milestone with the majority of its subscribers viewing more of their TV shows and movies via streaming than by DVD.

Competition… Netflix considers just about everyone short of movie theaters and radio stations as competition.  In cable: Time Warner Cable (NYSE: TWC) and Comcast Corporation (NASDAQ: CMCSA); in direct broadcast satellite providers: DIRECTV (NASDAQ: DTV) and Echostar Corporation (NASDAQ: SATS) in telecommunication IPTV providers: AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ); Internet movie and TV content providers: Apple Inc. (NASDAQ: AAPL) for iTunes, Amazon.com Inc. (NASDAQ: AMZN), Hulu.com and Google Inc. (NASDAQ: GOOG) for YouTube; DVD rental outlets and kiosks: Blockbuster and Coinstar Inc. (NASDAQ: CSTR) for Redbox; and retailers such as Best Buy Co. Inc. (NYSE: BBY), Wal-Mart Stores Inc. (NYSE: WMT), and Amazon.com Inc. (NASDAQ: AMZN). What is interesting is that while Amazon.com shows up twice in ‘competition’ is that Netflix also utilizes the services of third-party cloud computing providers from Amazon Web Services and others.

The calendar… Many might not consider this to be the case, but there is seasonality to the business.  The higher growth quarters are Q4 and Q1 from October to March.

Employee mix… The company’s workers are not covered by a collective bargaining agreement, i.e. non-union… It also had at the end of the year almost as many part-time workers as full-time: 2,149 part-time and 2,180 full-time.

Debt and dilution… As of the end of 2010, it had $200 million raised in a debt offering at a rate of 8.50% and it may incur additional debt in the future.  The company said the debt contains covenants which limit its discretion in the business operations and requires it to meet certain debt covenants.  As with most companies, Netflix may seek additional capital that may result in stockholder dilution or that may have rights senior to those of its common stockholders.

Insider control… As of December 31, 2010, the Netflix team of executive officers and directors and their immediate family members beneficially owned a total of about 11% of its outstanding common stock and stock options that are exercisable within 60 days.  CEO Reed Hastings owned approximately 5% of the company.

Anti-takeover provisions… We have not seen any Netflix buyout rumors of late due to price and valuation, but the company does have Anti-Takeover provisions.  Without shareholder approval, it can issue up to 10 million shares of undesignated preferred shares; it ca provide for a classified board of directors; it can prevent holders from acting by written consent; it can establish advance notice requirements in proposing matters to be approved by holders at meetings and it can prohibit holders from calling a special meeting.  Also, a merger or buyout may trigger retention payments to certain executive employees.

Land… Due to its physical operations, it has land requirements for warehousing and distribution, but it owns none of its major facilities.  Corporate HQ is 210,000 square feet in Los Gatos, CA and its lease ends in March 2018.  Its fulfillment centers are under lease agreements that expire at various dates through August 2016. Many companies own vast amounts of land which can be counted as assets in tangible book value, but that does not appear to be the case for Netflix.

No dividends… Netflix has not declared or paid any cash dividends, and it currently has no present intention of paying any cash dividends in the foreseeable future.

“Short-term assets versus long-term”… Under its “securities classified as Short-term investments,” of the total $155.9 million, only $18.966 million has a stated maturity of less than a year.  Some $134.014 million are due within 5-years, and almost 3 million is due after 10 years.

Again, none of these are meant to be more negative than positive in bias.  All companies list risks and many similar issues in annual reports.  The entire effort of reviewing 10-K reports is to find some of the hidden gems which investors may not normally consider when they are determining whether or not they want to invest in companies.  As always… Know what you are investing in.

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JON C. OGG

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