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Cover and table of contents
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, 2023
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) | ||||||||||
| 121 Albright Way, | 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, 2023, there were 437,679,669 shares of the registrant’s common stock, par value $0.001, outstanding.
Table of Contents
NETFLIX, INC.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| Revenues | $ | 8,541,668 | $ | 7,925,589 | $ | 24,890,472 | $ | 23,763,497 | |||||||||||||||
| Cost of revenues | 4,930,788 | 4,788,665 | 14,407,883 | 13,764,125 | |||||||||||||||||||
| Marketing | 558,736 | 567,954 | 1,741,266 | 1,698,892 | |||||||||||||||||||
| Technology and development | 657,159 | 662,739 | 2,002,417 | 2,037,115 | |||||||||||||||||||
| General and administrative | 478,591 | 373,213 | 1,281,012 | 1,180,438 | |||||||||||||||||||
| Operating income | 1,916,394 | 1,533,018 | 5,457,894 | 5,082,927 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (175,563) | (172,575) | (524,614) | (535,609) | |||||||||||||||||||
| Interest and other income | 168,218 | 261,404 | 123,975 | 677,275 | |||||||||||||||||||
| Income before income taxes | 1,909,049 | 1,621,847 | 5,057,255 | 5,224,593 | |||||||||||||||||||
| Provision for income taxes | (231,627) | (223,605) | (587,103) | (787,953) | |||||||||||||||||||
| Net income | $ | 1,677,422 | $ | 1,398,242 | $ | 4,470,152 | $ | 4,436,640 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 3.80 | $ | 3.14 | $ | 10.08 | $ | 9.98 | |||||||||||||||
| Diluted | $ | 3.73 | $ | 3.10 | $ | 9.90 | $ | 9.83 | |||||||||||||||
| Weighted-average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | 441,537 | 444,878 | 443,540 | 444,529 | |||||||||||||||||||
| Diluted | 450,011 | 450,344 | 451,319 | 451,168 |
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| Net income | $ | 1,677,422 | $ | 1,398,242 | $ | 4,470,152 | $ | 4,436,640 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | (94,157) | (103,167) | (16,117) | (207,148) | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Net unrealized gains (losses), net of tax effect of $(23) million, $0, $(23) million, and $0, respectively | 77,852 | — | 77,852 | — | |||||||||||||||||||
| Total other comprehensive income (loss) | (16,305) | (103,167) | 61,735 | (207,148) | |||||||||||||||||||
| Comprehensive income | $ | 1,661,117 | $ | 1,295,075 | $ | 4,531,887 | $ | 4,229,492 |
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income | $ | 1,677,422 | $ | 1,398,242 | $ | 4,470,152 | $ | 4,436,640 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Additions to content assets | (2,883,839) | (4,582,671) | (9,025,512) | (12,853,846) | |||||||||||||||||||
| Change in content liabilities | (325,989) | 60,867 | (634,661) | (95,054) | |||||||||||||||||||
| Amortization of content assets | 3,573,353 | 3,653,592 | 10,443,358 | 10,081,305 | |||||||||||||||||||
| Depreciation and amortization of property, equipment and intangibles | 90,660 | 85,188 | 270,380 | 243,295 | |||||||||||||||||||
| Stock-based compensation expense | 79,720 | 152,062 | 256,849 | 421,663 | |||||||||||||||||||
| Foreign currency remeasurement gain on debt | (172,678) | (348,458) | (63,075) | (814,792) | |||||||||||||||||||
| Other non-cash items | 115,688 | 102,513 | 357,179 | 409,855 | |||||||||||||||||||
| Deferred income taxes | (86,277) | (57,797) | (288,231) | (242,523) | |||||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||||||||
| Other current assets | 103,766 | (120,071) | (167,805) | 44,485 | |||||||||||||||||||
| Accounts payable | (68,390) | 53,875 | (119,726) | (283,617) | |||||||||||||||||||
| Accrued expenses and other liabilities | (65,029) | 212,072 | 298,101 | 324,116 | |||||||||||||||||||
| Deferred revenue | (5,733) | (48,420) | 41,524 | (42,053) | |||||||||||||||||||
| Other non-current assets and liabilities | (40,359) | (4,184) | (227,246) | (47,075) | |||||||||||||||||||
| Net cash provided by operating activities | 1,992,315 | 556,810 | 5,611,287 | 1,582,399 | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Purchases of property and equipment | (103,929) | (84,960) | (266,920) | (296,136) | |||||||||||||||||||
| Acquisitions | — | — | — | (193,397) | |||||||||||||||||||
| Purchases of short-term investments | — | — | (504,862) | — | |||||||||||||||||||
| Proceeds from maturities of short-term investments | 400,000 | — | 901,937 | — | |||||||||||||||||||
| Net cash provided by (used in) investing activities | 296,071 | (84,960) | 130,155 | (489,533) | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Repayments of debt | — | — | — | (700,000) | |||||||||||||||||||
| Proceeds from issuance of common stock | 57,818 | 4,113 | 118,563 | 29,041 | |||||||||||||||||||
| Repurchases of common stock | (2,500,100) | — | (3,545,347) | — | |||||||||||||||||||
| Other financing activities | (32,826) | — | (71,746) | — | |||||||||||||||||||
| Net cash provided by (used in) financing activities | (2,475,108) | 4,113 | (3,498,530) | (670,959) | |||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (122,707) | (180,058) | (56,658) | (336,704) | |||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (309,429) | 295,905 | 2,186,254 | 85,203 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 7,666,265 | 5,844,409 | 5,170,582 | 6,055,111 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 7,356,836 | $ | 6,140,314 | $ | 7,356,836 | $ | 6,140,314 |
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Balance Sheets
(in thousands, except share and par value data)
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 7,353,245 | $ | 5,147,176 | |||||||
| Short-term investments | 514,201 | 911,276 | |||||||||
| Other current assets | 2,912,028 | 3,208,021 | |||||||||
| Total current assets | 10,779,474 | 9,266,473 | |||||||||
| Content assets, net | 31,749,861 | 32,736,713 | |||||||||
| Property and equipment, net | 1,498,391 | 1,398,257 | |||||||||
| Other non-current assets | 5,474,060 | 5,193,325 | |||||||||
| Total assets | $ | 49,501,786 | $ | 48,594,768 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Current content liabilities | $ | 4,259,582 | $ | 4,480,150 | |||||||
| Accounts payable | 534,429 | 671,513 | |||||||||
| Accrued expenses and other liabilities | 1,838,908 | 1,514,650 | |||||||||
| Deferred revenue | 1,306,185 | 1,264,661 | |||||||||
| Short-term debt | 399,614 | — | |||||||||
| Total current liabilities | 8,338,718 | 7,930,974 | |||||||||
| Non-current content liabilities | 2,668,472 | 3,081,277 | |||||||||
| Long-term debt | 13,900,754 | 14,353,076 | |||||||||
| Other non-current liabilities | 2,486,215 | 2,452,040 | |||||||||
| Total liabilities | 27,394,159 | 27,817,367 | |||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock, $0.001 par value; 4,990,000,000 shares authorized at September 30, 2023 and December 31, 2022; 437,679,669 and 445,346,776 issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 5,011,427 | 4,637,601 | |||||||||
| Treasury stock at cost (10,600,660 and 1,564,478 shares at September 30, 2023 and December 31, 2022, respectively) | (4,399,677) | (824,190) | |||||||||
| Accumulated other comprehensive loss | (155,571) | (217,306) | |||||||||
| Retained earnings | 21,651,448 | 17,181,296 | |||||||||
| Total stockholders’ equity | 22,107,627 | 20,777,401 | |||||||||
| Total liabilities and stockholders’ equity | $ | 49,501,786 | $ | 48,594,768 |
See accompanying notes to the consolidated financial statements.
NETFLIX, INC.
Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| Total stockholders' equity, beginning balances | $ | 22,832,215 | $ | 19,075,974 | $ | 20,777,401 | $ | 15,849,248 | ||||||||||||||||||
| Common stock and additional paid-in capital: | ||||||||||||||||||||||||||
| Beginning balances | $ | 4,874,208 | $ | 4,316,870 | $ | 4,637,601 | $ | 4,024,561 | ||||||||||||||||||
| Issuance of common stock upon exercise of options | 57,499 | 5,030 | 116,977 | 27,738 | ||||||||||||||||||||||
| Stock-based compensation expense | 79,720 | 152,062 | 256,849 | 421,663 | ||||||||||||||||||||||
| Ending balances | $ | 5,011,427 | $ | 4,473,962 | $ | 5,011,427 | $ | 4,473,962 | ||||||||||||||||||
| Treasury stock: | ||||||||||||||||||||||||||
| Beginning balances | $ | (1,876,753) | $ | (824,190) | $ | (824,190) | $ | (824,190) | ||||||||||||||||||
| Repurchases of common stock to be held as treasury stock | (2,522,924) | — | (3,575,487) | — | ||||||||||||||||||||||
| Ending balances | $ | (4,399,677) | $ | (824,190) | $ | (4,399,677) | $ | (824,190) | ||||||||||||||||||
| Accumulated other comprehensive loss: | ||||||||||||||||||||||||||
| Beginning balances | $ | (139,266) | $ | (144,476) | $ | (217,306) | $ | (40,495) | ||||||||||||||||||
| Other comprehensive income (loss) | (16,305) | (103,167) | 61,735 | (207,148) | ||||||||||||||||||||||
| Ending balances | $ | (155,571) | $ | (247,643) | $ | (155,571) | $ | (247,643) | ||||||||||||||||||
| Retained earnings: | ||||||||||||||||||||||||||
| Beginning balances | $ | 19,974,026 | $ | 15,727,770 | $ | 17,181,296 | $ | 12,689,372 | ||||||||||||||||||
| Net income | 1,677,422 | 1,398,242 | 4,470,152 | 4,436,640 | ||||||||||||||||||||||
| Ending balances | $ | 21,651,448 | $ | 17,126,012 | $ | 21,651,448 | $ | 17,126,012 | ||||||||||||||||||
| Total stockholders' equity, ending balances | $ | 22,107,627 | $ | 20,528,141 | $ | 22,107,627 | $ | 20,528,141 |
See accompanying notes to the consolidated financial statements.
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, 2022 filed with the Securities and Exchange Commission (the “SEC”) on January 26, 2023. 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 amortization of content assets 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, 2022. Interim results are not necessarily indicative of the results for a full year.
The following is provided to update the Company’s significant accounting policies previously described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Derivative Financial Instruments
The Company uses derivative instruments to manage foreign exchange risk related to its ongoing business operations with the primary objective of reducing operating income and cash flow volatility associated with fluctuations in foreign exchange rates.
The Company enters into forward contracts to manage the foreign exchange risk on forecasted revenue transactions denominated in currencies other than the U.S. dollar, as well as the foreign exchange risk on forecasted transactions and firm commitments related to the licensing and production of foreign currency-denominated content assets. These forward contracts are designated as cash flow hedges of foreign currency firm commitments and forecasted transactions and generally have maturities of 24 months or less. The hedging contracts may reduce, but do not entirely eliminate, the effect of foreign currency exchange movements, and the Company may choose not to hedge certain exposures.
The Company recognizes derivative instruments at fair value as either assets (presented in “Other current assets” and “Other non-current assets”) or liabilities (presented in “Accrued expenses and other liabilities'' and “Other non-current liabilities”) on the Company’s Consolidated Balance Sheets. The Company classifies derivative instruments in the Level 2 category within the fair value hierarchy.
The gain or loss on derivative instruments designated as cash flow hedges of forecasted foreign currency revenue is initially reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into “Revenues” on the Consolidated Statements of Operations in the same period the forecasted transaction affects earnings. The gain or loss on derivative instruments designated as cash flow hedges of firmly committed or forecasted transactions related to the licensing and production of content assets is initially reported as a component of AOCI and reclassified into “Cost of Revenues” on the Consolidated Statements of Operations in the same period the hedged transaction affects earnings, which occurs as the underlying hedged content assets are amortized. Cash flows from hedging activities are classified in the same category as the cash flows for the underlying item being hedged within "Net cash provided by (used in) operating activities" on the Consolidated Statements of Cash Flows.
In the event that the likelihood of occurrence of the underlying forecasted transactions is determined to be probable not to occur, the gains or losses on the related cash flow hedges are reclassified from AOCI to “Interest and other income (expense)” in the Consolidated Statements of Operations in the period of dedesignation.
See Note 7 Derivative Financial Instruments to the consolidated financial statements for further information regarding the Company’s derivative financial instruments.
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. However, if there is no distinct service provided in exchange for the payments made to the partners or if 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 Company also earns revenue from advertisements presented on its streaming service, consumer products and various other sources. Revenues earned from sources other than monthly membership fees were not material for the three and nine months ended September 30, 2023 and September 30, 2022.
The following tables summarize revenues, paid net membership additions (losses), and ending paid memberships by region for the three and nine months ended September 30, 2023 and September 30, 2022, respectively:
United States and Canada (UCAN)
| As of/ Three Months Ended | As of/ Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues | $ | 3,735,133 | $ | 3,601,565 | $ | 10,943,226 | $ | 10,489,852 | ||||||||||||||||||
| Paid net membership additions (losses) | 1,750 | 104 | 3,025 | (1,828) | ||||||||||||||||||||||
| Paid memberships at end of period (1) | 77,321 | 73,387 | 77,321 | 73,387 | ||||||||||||||||||||||
Europe, Middle East, and Africa (EMEA)
| As of/ Three Months Ended | As of/ Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues | $ | 2,693,146 | $ | 2,375,814 | $ | 7,772,957 | $ | 7,394,880 | ||||||||||||||||||
| Paid net membership additions (losses) | 3,953 | 568 | 7,031 | (502) | ||||||||||||||||||||||
| Paid memberships at end of period (1) | 83,760 | 73,534 | 83,760 | 73,534 | ||||||||||||||||||||||
Latin America (LATAM)
| As of/ Three Months Ended | As of/ Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues | $ | 1,142,811 | $ | 1,023,945 | $ | 3,290,438 | $ | 3,053,127 | ||||||||||||||||||
| Paid net membership additions (losses) | 1,179 | 312 | 1,946 | (25) | ||||||||||||||||||||||
| Paid memberships at end of period (1) | 43,645 | 39,936 | 43,645 | 39,936 | ||||||||||||||||||||||
Asia-Pacific (APAC)
| As of/ Three Months Ended | As of/ Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues | $ | 948,216 | $ | 889,037 | $ | 2,801,012 | $ | 2,713,510 | ||||||||||||||||||
| Paid net membership additions (losses) | 1,881 | 1,429 | 4,404 | 3,596 | ||||||||||||||||||||||
| Paid memberships at end of period (1) | 42,427 | 36,228 | 42,427 | 36,228 | ||||||||||||||||||||||
| (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 certain other promotions that may be offered by the Company to new or rejoining members. Certain members have the option to add extra member sub accounts. These extra member sub accounts are not included in paid memberships. 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, become 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 $3.5 billion and $10.1 billion, respectively, for the three and nine months ended September 30, 2023 and $3.3 billion and $9.7 billion, respectively, for the three and nine months ended September 30, 2022. DVD revenues were $22 million and $83 million, respectively, for the three and nine months ended September 30, 2023 and $35 million and $112 million, respectively, for the three and nine months ended September 30, 2022.
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, 2023, total deferred revenue was $1,306 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 $42 million increase in deferred revenue as compared to the balance of $1,265 million as of December 31, 2022 is a result of the increase in membership fees billed due to increased memberships.
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 outstanding shares of common stock during the period. Potential shares of common stock 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, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||
| Net income | $ | 1,677,422 | $ | 1,398,242 | $ | 4,470,152 | $ | 4,436,640 | |||||||||||||||
| Shares used in computation: | |||||||||||||||||||||||
| Weighted-average shares of common stock outstanding | 441,537 | 444,878 | 443,540 | 444,529 | |||||||||||||||||||
| Basic earnings per share | $ | 3.80 | $ | 3.14 | $ | 10.08 | $ | 9.98 | |||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||
| Net income | $ | 1,677,422 | $ | 1,398,242 | $ | 4,470,152 | $ | 4,436,640 | |||||||||||||||
| Shares used in computation: | |||||||||||||||||||||||
| Weighted-average shares of common stock outstanding | 441,537 | 444,878 | 443,540 | 444,529 | |||||||||||||||||||
| Employee stock options | 8,474 | 5,466 | 7,779 | 6,639 | |||||||||||||||||||
| Weighted-average number of shares | 450,011 | 450,344 | 451,319 | 451,168 | |||||||||||||||||||
| Diluted earnings per share | $ | 3.73 | $ | 3.10 | $ | 9.90 | $ | 9.83 |
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 shares of common stock excluded from the diluted calculation:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Employee stock options | 3,147 | 8,536 | 4,447 | 6,487 |
4. Cash, Cash Equivalents, Restricted Cash, and Short-term Investments
The Company’s investment policy is consistent with the definition of available-for-sale securities. The Company does not buy and hold securities principally for the purpose of selling them in the near future. The Company’s policy is focused on the preservation of capital, liquidity and return. From time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. The following tables summarize the Company's cash, cash equivalents, restricted cash and short-term investments as of September 30, 2023 and December 31, 2022:
| As of September 30, 2023 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | Short-term investments | Other Current Assets | Non-current Assets | Total | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Cash | $ | 5,241,192 | $ | — | $ | 1,933 | $ | 1,604 | $ | 5,244,729 | |||||||||||||||||||
| Level 1 securities: | |||||||||||||||||||||||||||||
| Money market funds | 1,592,131 | — | — | 54 | 1,592,185 | ||||||||||||||||||||||||
| Level 2 securities: | |||||||||||||||||||||||||||||
| Time Deposits (1) | 519,922 | 514,201 | — | — | 1,034,123 | ||||||||||||||||||||||||
| $ | 7,353,245 | $ | 514,201 | $ | 1,933 | $ | 1,658 | $ | 7,871,037 | ||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | Short-term investments | Other Current Assets | Non-current Assets | Total | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Cash | $ | 4,071,584 | $ | — | $ | 3,410 | $ | 19,874 | $ | 4,094,868 | |||||||||||||||||||
| Level 1 securities: | |||||||||||||||||||||||||||||
| Money market funds | 569,826 | — | — | 122 | 569,948 | ||||||||||||||||||||||||
| Level 2 securities: | |||||||||||||||||||||||||||||
| Time Deposits (1) | 505,766 | 911,276 | — | — | 1,417,042 | ||||||||||||||||||||||||
| $ | 5,147,176 | $ | 911,276 | $ | 3,410 | $ | 19,996 | $ | 6,081,858 |
(1) The majority of the Company's time deposits are domestic deposits, which mature within one year.
Other current assets include restricted cash for deposits related to self insurance and letter of credit agreements. Non-current assets include restricted cash related to letter of credit agreements. The fair value of cash equivalents and short-term investments 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 Debt 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, 2023 and 2022, respectively.
5. Balance Sheet Components
Content Assets, Net
Content assets consisted of the following:
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Licensed content, net | $ | 12,459,413 | $ | 12,732,549 | |||||||
| Produced content, net | |||||||||||
| Released, less amortization | 9,433,878 | 9,110,518 | |||||||||
| In production | 9,052,140 | 10,255,940 | |||||||||
| In development and pre-production | 804,430 | 637,706 | |||||||||
| 19,290,448 | 20,004,164 | ||||||||||
| Content assets, net | $ | 31,749,861 | $ | 32,736,713 | |||||||
As of September 30, 2023, approximately $5,575 million, $2,812 million, and $1,888 million of the $12,459 million unamortized cost of the licensed content is expected to be amortized in each of the next three years. As of September 30, 2023, approximately $3,594 million, $2,493 million, and $1,744 million of the $9,434 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, 2023, the amount of accrued participations and residuals was not material.
The following tables represent the amortization of content assets:
| Three Months Ended | |||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Licensed content | $ | 1,777,701 | $ | 1,967,720 | |||||||
| Produced content | 1,795,652 | 1,685,872 | |||||||||
| Total | $ | 3,573,353 | $ | 3,653,592 |
| Nine Months Ended | |||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Licensed content | $ | 5,280,700 | $ | 5,751,940 | |||||||
| Produced content | 5,162,658 | 4,329,365 | |||||||||
| Total | $ | 10,443,358 | $ | 10,081,305 |
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
| As of | ||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | Estimated Useful Lives | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Land | $ | 86,662 | $ | 85,005 | ||||||||||||||||
| Buildings | 104,593 | 52,106 | 30 years | |||||||||||||||||
| Leasehold improvements | 1,053,681 | 1,040,570 | Over life of lease | |||||||||||||||||
| Furniture and fixtures | 155,184 | 153,682 | 3 years | |||||||||||||||||
| Information technology | 462,303 | 442,681 | 3 years | |||||||||||||||||
| Corporate aircraft | 133,998 | 115,578 | 8-10 years | |||||||||||||||||
| Machinery and equipment | 27,362 | 26,821 | 3-5 years | |||||||||||||||||
| Capital work-in-progress | 377,299 | 235,555 | ||||||||||||||||||
| Property and equipment, gross | 2,401,082 | 2,151,998 | ||||||||||||||||||
| Less: Accumulated depreciation | (902,691) | (753,741) | ||||||||||||||||||
| Property and equipment, net | $ | 1,498,391 | $ | 1,398,257 |
Leases
The Company has entered into operating leases primarily for real estate. 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.
Information related to the Company's operating right-of-use assets and related operating lease liabilities were as follows:
| Three Months Ended | |||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for operating lease liabilities | $ | 110,959 | $ | 105,848 | |||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | 49,238 | 2,938 |
| Nine Months Ended | |||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for operating lease liabilities | $ | 339,126 | $ | 308,747 | |||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | 161,704 | 183,540 |
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Operating lease right-of-use assets, net | $ | 2,124,501 | $ | 2,227,122 | |||||||
| Current operating lease liabilities | 377,400 | 355,985 | |||||||||
| Non-current operating lease liabilities | 2,086,480 | 2,222,503 | |||||||||
| Total operating lease liabilities | $ | 2,463,880 | $ | 2,578,488 |
Other Current Assets
Other current assets consisted of the following:
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (in thousands) | ||||||||||||||
| Trade receivables | $ | 1,139,974 | $ | 988,898 | ||||||||||
| Prepaid expenses | 482,375 | 392,735 | ||||||||||||
| Other | 1,289,679 | 1,826,388 | ||||||||||||
| Total other current assets | $ | 2,912,028 | $ | 3,208,021 |
The decrease in Other was primarily driven by receipt of amounts due under a modified content licensing arrangement.
6. Debt
As of September 30, 2023, the Company had aggregate outstanding notes of $14,300 million, net of $68 million of issuance costs, with varying maturities (the "Notes"). Of the outstanding balance, $400 million, net of issuance costs, is classified as short-term debt on the Consolidated Balance Sheets. As of December 31, 2022, the Company had aggregate outstanding notes of $14,353 million, net of $79 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 gain totaling $173 million and $63 million, respectively, for the three and nine months ended September 30, 2023).
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, 2023 and December 31, 2022:
| Principal Amount at Par | Level 2 Fair Value as of | |||||||||||||||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | Issuance Date | Maturity | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| 5.750% Senior Notes | $ | 400 | $ | 400 | February 2014 | March 2024 | $ | 400 | $ | 404 | ||||||||||||||||||||||||||||
| 5.875% Senior Notes | 800 | 800 | February 2015 | February 2025 | 799 | 811 | ||||||||||||||||||||||||||||||||
| 3.000% Senior Notes (1) | 497 | 503 | April 2020 | June 2025 | 489 | 495 | ||||||||||||||||||||||||||||||||
| 3.625% Senior Notes | 500 | 500 | April 2020 | June 2025 | 482 | 479 | ||||||||||||||||||||||||||||||||
| 4.375% Senior Notes | 1,000 | 1,000 | October 2016 | November 2026 | 965 | 980 | ||||||||||||||||||||||||||||||||
| 3.625% Senior Notes (1) | 1,375 | 1,391 | May 2017 | May 2027 | 1,347 | 1,338 | ||||||||||||||||||||||||||||||||
| 4.875% Senior Notes | 1,600 | 1,600 | October 2017 | April 2028 | 1,552 | 1,557 | ||||||||||||||||||||||||||||||||
| 5.875% Senior Notes | 1,900 | 1,900 | April 2018 | November 2028 | 1,919 | 1,930 | ||||||||||||||||||||||||||||||||
| 4.625% Senior Notes (1) | 1,163 | 1,177 | October 2018 | May 2029 | 1,175 | 1,151 | ||||||||||||||||||||||||||||||||
| 6.375% Senior Notes | 800 | 800 | October 2018 | May 2029 | 827 | 830 | ||||||||||||||||||||||||||||||||
| 3.875% Senior Notes (1) | 1,269 | 1,284 | April 2019 | November 2029 | 1,233 | 1,201 | ||||||||||||||||||||||||||||||||
| 5.375% Senior Notes | 900 | 900 | April 2019 | November 2029 | 879 | 885 | ||||||||||||||||||||||||||||||||
| 3.625% Senior Notes (1) | 1,164 | 1,177 | October 2019 | June 2030 | 1,106 | 1,078 | ||||||||||||||||||||||||||||||||
| 4.875% Senior Notes | 1,000 | 1,000 | October 2019 | June 2030 | 946 | 944 | ||||||||||||||||||||||||||||||||
| $ | 14,368 | $ | 14,432 | $ | 14,119 | $ | 14,083 |
(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.
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, 2023 and December 31, 2022, the Company was in compliance with all related covenants.
Revolving Credit Facility
On March 6, 2023, the Company amended its $1 billion unsecured revolving credit facility ("Revolving Credit Agreement") to replace the London interbank offered rate to a variable secured overnight financing rate (the “Term SOFR Rate”) as the rate to which interest payments are indexed, among other things. The Revolving Credit Agreement matures on June 17, 2026. Revolving loans may be borrowed, repaid and reborrowed until June 17, 2026, 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, 2023, 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 the Term SOFR Rate (or the applicable benchmark replacement), 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 Term SOFR Rate for a one-month tenor, plus 1.00%. The Term SOFR Rate is the forward-looking secured overnight financing rate administered by the Federal Reserve Bank of New York or a successor administrator, for the relevant interest period, but in no event shall the Term SOFR Rate be less than 0.00% per annum.
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, 2023 and December 31, 2022, the Company was in compliance with all related covenants.
7. Derivative Financial Instruments
In the third quarter of 2023, the Company began using derivative financial instruments to manage foreign exchange risk related to its ongoing business operations with the primary objective of reducing operating income and cash flow volatility associated with fluctuations in foreign exchange rates. The Company did not use any derivative instruments prior to the third quarter of 2023.
Notional Amount of Derivative Contracts
The net notional amounts of the Company’s outstanding derivative instruments were as follows:
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Derivatives designated as hedging instruments: | |||||||||||
| Foreign exchange contracts | |||||||||||
| Cash flow hedges | $ | 3,571,367 | $ | — | |||||||
| Total | $ | 3,571,367 | $ | — |
Fair Value of Derivative Contracts
The fair value of the Company’s outstanding derivative instruments were as follows:
| As of September 30, 2023 | |||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| Other current assets | Other non-current assets | Accrued expenses and other liabilities | Other non-current liabilities | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 74,541 | $ | 35,182 | $ | 6,525 | $ | 2,029 | |||||||||||||||
| Total | $ | 74,541 | $ | 35,182 | $ | 6,525 | $ | 2,029 | |||||||||||||||
The Company classifies derivative instruments in the Level 2 category within the fair value hierarchy. These instruments are valued using industry standard valuation models that use observable inputs such as interest rate yield curves, and forward and spot prices for currencies.
As of September 30, 2023, the pre-tax net accumulated gain on our foreign currency cash flow hedges included in AOCI on the Consolidated Balance Sheets expected to be recognized in earnings within the next 12 months is $74 million.
Master Netting Agreements
In order to mitigate counterparty credit risk, the Company enters into master netting agreements with its counterparties for its foreign currency exchange contracts which permit the parties to settle amounts on a net basis under certain conditions. The Company has elected to present its derivative assets and liabilities on a gross basis on its Consolidated Balance Sheets.
The Company also enters into collateral security arrangements with its counterparties that require the parties to post cash collateral when certain contractual thresholds are met. No cash collateral was received or posted by the Company as of September 30, 2023.
The potential offsetting effect to the Company’s derivative assets and liabilities under its master netting agreements and collateral security agreements were as follows:
| As of September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Gross Amount Not Offset in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Gross Amount Recognized in the Consolidated Balance Sheets | Gross Amount Offset in the Consolidated Balance Sheets | Net Amount Presented in the Consolidated Balance Sheets | Financial Instruments | Collateral Received and Posted | Net Amount | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 109,723 | $ | — | $ | 109,723 | $ | (8,463) | $ | — | $ | 101,260 | |||||||||||||||||||||||
| Derivative liabilities | 8,554 | — | 8,554 | (8,463) | — | 91 | |||||||||||||||||||||||||||||
Effect of Derivative Instruments on Consolidated Financial Statements
The pre-tax gains (losses) on the Company’s cash flow hedges recognized in AOCI were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Foreign exchange contracts (1) | |||||||||||||||||||||||
| Amount included in the assessment of effectiveness | $ | 101,169 | $ | — | $ | 101,169 | $ | — | |||||||||||||||
| Total | $ | 101,169 | $ | — | $ | 101,169 | $ | — |
(1) No amounts were excluded from the assessment of effectiveness.
No gains or losses on derivative instruments were reclassified from AOCI into the Consolidated Statements of Operations in the three and nine months ended September 30, 2023.
8. Commitments and Contingencies
Content
As of September 30, 2023, the Company had $19.7 billion of obligations comprised of $4.3 billion included in "Current content liabilities" and $2.7 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $12.7 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for recognition.
As of December 31, 2022, the Company had $21.8 billion of obligations comprised of $4.5 billion included in "Current content liabilities" and $3.1 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $14.2 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for recognition.
The expected timing of payments for these content obligations is as follows:
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Less than one year | $ | 9,512,081 | $ | 10,038,483 | |||||||
| Due after one year and through three years | 8,470,469 | 9,425,551 | |||||||||
| Due after three years and through five years | 1,449,676 | 2,124,307 | |||||||||
| Due after five years | 217,823 | 243,606 | |||||||||
| Total content obligations | $ | 19,650,049 | $ | 21,831,947 |
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.
9. Stockholders’ Equity
Stock Option Plan
In June 2020, the Company's stockholders approved the 2020 Stock Plan, which was adopted by the Company’s Board of Directors in March 2020 subject to stockholder approval. 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.
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) | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||||
| Balances as of December 31, 2022 | 16,454,103 | 19,896,861 | $ | 242.22 | |||||||||||||||||||||||||
| Granted | (1,372,702) | 1,372,702 | 360.44 | ||||||||||||||||||||||||||
| Exercised | — | (1,369,075) | 85.43 | ||||||||||||||||||||||||||
| Expired | — | (3,314) | 32.04 | ||||||||||||||||||||||||||
| Balances as of September 30, 2023 | 15,081,401 | 19,897,174 | $ | 261.20 | 5.41 | $ | 2,780,062 | ||||||||||||||||||||||
| Vested and expected to vest as of September 30, 2023 | 19,897,174 | $ | 261.20 | 5.41 | $ | 2,780,062 | |||||||||||||||||||||||
| Exercisable as of September 30, 2023 | 19,709,179 | $ | 260.11 | 5.37 | $ | 2,775,752 |
The aggregate intrinsic value in the table above 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 2023 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 2023. This amount changes based on the fair market value of the Company’s common stock.
A summary of the amounts related to option exercises, is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total intrinsic value of options exercised | $ | 160,031 | $ | 65,087 | $ | 414,132 | $ | 262,879 | |||||||||||||||
| Cash received from options exercised | 57,818 | 4,113 | 118,563 | 29,041 |
Stock-based Compensation
Stock options are generally vested in full upon grant date and exercisable for the full ten year contractual term regardless of employment status. Stock options granted to certain named executive officers vest on the one-year anniversary of the grant date, subject to the employee’s continuous employment or service with the Company through the vesting date. 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, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| Dividend yield | — | % | — | % | — | % | — | % | |||||||||||||||
| Expected volatility | 40 | % | 50 | % | 40% - 46% | 38% - 50% | |||||||||||||||||
| Risk-free interest rate | 3.95 | % | 2.98 | % | 3.57% - 3.95% | 1.71% - 2.98% | |||||||||||||||||
| Suboptimal exercise factor | 4.27 | 4.73 | 4.22 - 4.27 | 4.71 - 4.73 | |||||||||||||||||||
| Weighted-average fair value (per share) | $ | 244 | $ | 127 | $ | 205 | $ | 150 | |||||||||||||||
| Total stock-based compensation expense (in thousands) | $ | 79,720 | $ | 152,062 | $ | 256,849 | $ | 421,663 | |||||||||||||||
| Total income tax impact on provision (in thousands) | $ | 17,452 | $ | 33,724 | $ | 56,311 | $ | 93,472 |
Stock Repurchases
In March 2021, the Company’s Board of Directors authorized the repurchase of up to $5 billion of its common stock, with no expiration date, and in September 2023, the Board of Directors increased the share repurchase authorization by an additional $10 billion, also with no expiration date. Stock repurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or other similar purchase techniques and in such amounts as management deems appropriate. The Company is not obligated to repurchase any specific number of shares, and the timing and actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, general economic, business and market conditions, and alternative investment opportunities. The Company may discontinue any repurchases of its common stock at any time without prior notice. During the three and nine months ended September 30, 2023, the Company repurchased 5,964,802 and 9,036,182 shares, respectively, for an aggregate amount of $2,500 million and $3,545 million, respectively. As of September 30, 2023, $10.9 billion remain available for repurchases. Shares repurchased by the Company are accounted for when the transaction is settled. As of September 30, 2023, there were no unsettled share repurchases. Direct costs incurred to acquire the shares are included in the total cost of the shares.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax:
| Foreign Currency Translation Adjustments | Change in Unrealized Gains (Losses) on Cash Flow Hedges | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balances as of December 31, 2022 | $ | (217,306) | $ | — | $ | (217,306) | |||||||||||
| Other comprehensive income (loss) before reclassifications | (16,117) | 77,852 | 61,735 | ||||||||||||||
| Balances as of September 30, 2023 | $ | (233,423) | $ | 77,852 | $ | (155,571) |
| Foreign Currency Translation Adjustments | Change in Unrealized Gains (Losses) on Cash Flow Hedges | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balances as of December 31, 2021 | $ | (40,495) | $ | — | $ | (40,495) | |||||||||||
| Other comprehensive income (loss) before reclassifications | (207,148) | — | (207,148) | ||||||||||||||
| Balances as of September 30, 2022 | $ | (247,643) | $ | — | $ | (247,643) |
10. Income Taxes
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||
| Provision for income taxes | $ | 231,627 | $ | 223,605 | $ | 587,103 | $ | 787,953 | ||||||||||||||||||
| Effective tax rate | 12 | % | 14 | % | 12 | % | 15 | % |
The effective tax rates for the three and nine months ended September 30, 2023 and 2022, differed from the Federal statutory rate primarily due to the impact of international provisions of the Tax Cuts and Jobs Act, research and development credits, and the recognition of excess tax benefits of stock-based compensation.
The decrease in the effective tax rates for the three and nine months ended September 30, 2023, as compared to the same period in 2022 was primarily due to the impact of foreign taxes and the recognition of excess tax benefits of stock-based compensation. For the three and nine months ended September 30, 2023, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $28 million and $80 million, compared to the three and nine months ended September 30, 2022 of $14 million and $57 million.
Gross unrecognized tax benefits were $213 million and $227 million as of September 30, 2023 and December 31, 2022, respectively. The gross unrecognized tax benefits as of September 30, 2023, if recognized by the Company, will result in a reduction of approximately $134 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate.
The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for the years 2016 through 2018 and is subject to examination for 2019 through 2022. The foreign and state tax returns for the years 2016 through 2022 are subject to examination by various states and foreign jurisdictions. While the Company is in various stages of inquiries and examinations by federal, state and foreign taxing authorities, we believe that our tax positions will more likely than not be sustained. Nonetheless, it is possible that future obligations related to these matters could arise.
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. However, an estimate of the range of reasonably possible adjustments cannot be made at this time.
11. 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.
Total U.S. revenues were $3.5 billion and $10.1 billion, respectively, for the three and nine months ended September 30, 2023, and $3.3 billion and $9.7 billion, respectively, for the three and nine months ended September 30, 2022. 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, 2023 and December 31, 2022, were located as follows:
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | 2,799,543 | $ | 2,745,071 | |||||||
| International | 823,349 | 880,308 |
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations