Assignment 1: Forecasting Revenue, Costs, and Estimated Cash Flows

Imagine that you are a financial advisor for Netflix, Inc., and Amazon.com, Inc. You are tasked with creating a comprehensive forecast of the revenue, costs, and cash flows of these companies, answering key questions that may influence their future decisions.

To prepare for this Assignment, use the Netflix and Amazon Data Spreadsheet, located in this week?s Learning Resources, to generate a pro forma forecast and consider what this indicates about the future for these two companies.

In a1- to 2-page paper, provide the following:

• AforecastofNetflix,Inc.,andAmazon.com,Inc.?srevenue,costs,andestimatedcashflowsintothenextfiveyears.
• TheappropriatediscountrateforNetflix,Inc.,andAmazon.com,Inc.?sforecastedcashflows.
• Anappropriaterisk-adjustedrateofreturnforuseinevaluatinganinvestmentinNetflix,Inc.,andAmazon.com,Inc.
• Adeterminationoftheestimatedfairmarketvalueof100%ofNetflix,Inc.,andAmazon.com,Inc.?sequity.

Netflix Inc. 2012 2013 2014 Revenues Cost of revenues* Marketing* Technology and development General and administrative Operating income (loss) Other income (expense): Interest expense Interest and other income (expense) Loss on extinguishment of debt Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) $ Earnings per share: Basic Diluted Weighted-average common shares outstanding: Basic Diluted $ $ $ 3,609,282 $ 2,652,058 439,208 329,008 139,016 49,992 4,374,562 $ 3,117,203 469,942 378,769 180,301 228,347 (19,986) 474 30,480 13,328 (29,142) (3,002) (25,129) 171,074 58,671 (50,219) (3,060) 349,369 82,570 17,152 $ 112,403 $ 266,799 .31 $ .29 $ 1.93 $ 1.85 $ 4.44 4.32 55,521 58,904 58,198 60,761 5,504,656 3,752,760 607,186 472,321 269,741 402,648 60,078 61,699 Netflix Inc. 2012 Assets Current assets: Cash and cash equivalents Short-term investments Current content library, net Other current assets Total current assets Non-current content library, net Property and equipment, net Other non-current assets Total assets Liabilities and Stockholders' Equity Current liabilities: Current content liabilities Accounts payable Accrued expenses Deferred revenue Total current liabilities Non-current content liabilities Long-term debt Long-term debt due to related party Other non-current liabilities Total liabilities Stockholders' equity: 2013 2014 $ 290,291 $ 457,787 1,368,162 124,551 2,240,791 1,506,008 131,681 89,410 604,965 $ 595,440 1,706,421 151,937 3,058,763 2,091,071 133,605 129,124 1,113,608 494,888 2,125,702 206,271 3,940,469 2,773,326 149,875 192,981 $ 3,967,890 $ 5,412,563 $ 7,056,651 $ 1,366,847 $ 86,468 53,139 169,472 1,675,926 1,076,622 200,000 200,000 70,669 3,223,217 1,775,983 $ 108,435 54,018 215,767 2,154,203 1,345,590 500,000 79,209 4,079,002 2,117,241 201,581 69,746 274,586 2,663,154 1,575,832 900,000 ### 59,957 5,198,943 60 777,441 3,575 552,485 1,333,561 ### 1,042,810 (4,446) 819,284 1,857,708 5,412,563 $ 7,056,651 Total stockholders' equity Total liabilities and stockholde $ 56 301,616 2,919 440,082 744,673 3,967,890 $ Netflix Inc. Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Additions to streaming content library Change in streaming content liabilities Amortization of streaming content library Amortization of DVD content library Depreciation and amortization of property, equipment and intangibles Stock-based compensation expense Excess tax benefits from stock-based compensation Other non-cash items Loss on extinguishment of debt Deferred taxes Changes in operating assets and liabilities: Other current assets Accounts payable Accrued expenses Deferred revenue Other non-current assets and liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of DVD content library Purchases of property and equipment Other assets Purchases of short-term investments Proceeds from sale of short-term investments Proceeds from maturities of short-term investments Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from issuance of common stock Proceeds from issuance of debt Issuance costs Redemption of debt Excess tax benefits from stock-based compensation Principal payments of lease financing obligations Net cash provided by (used in) financing activities 2012 $ Non-GAAP free cash flow reconciliation: Net cash provided by (used in) operating activities Acquisition of DVD content library Purchases of property and equipment Other assets Non-GAAP free cash flow 17,152 $ 112,403 $ 2014 266,799 (2,515,506) 762,089 1,591,218 65,396 45,469 73,948 (4,543) (8,392) (30,071) (3,049,758) 673,785 2,121,981 71,325 48,374 73,100 (81,663) 5,332 25,129 (22,044) (3,773,459) 593,125 2,656,279 71,491 54,028 115,239 (89,341) 15,282 (30,063) (5,432) (4,943) 9,806 20,676 4,719 21,586 62,234 18,374 1,941 46,295 (8,977) 97,831 (8,758) 83,812 55,636 58,819 (52,406) 16,483 (48,275) (40,278) 8,816 (477,321) 282,953 29,365 (244,740) (65,927) (54,143) 5,939 (550,264) 347,502 60,925 (255,968) (74,790) (69,726) 1,334 (426,934) 385,300 141,950 (42,866) 4,124 (759) 4,543 (2,319) 5,589 124,557 500,000 (9,414) (219,362) 81,663 (1,180) 476,264 60,544 400,000 (7,080) 89,341 (1,093) 541,712 (197) (217,762) 508,053 Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2013 (3,453) 314,674 290,291 (6,686) 508,643 604,965 $ 290,291 $ 604,965 $ 1,113,608 $ 21,586 $ (48,275) (40,278) 8,816 97,831 $ (65,927) (54,143) 5,939 16,483 (74,790) (69,726) 1,334 $ (58,151) $ (16,300) $ (126,699) Amazon.com Inc. 2012 2013 2014 $61.09B 46.8B 44.65B 2.16B $74.45B 54.63B 51.38B 3.25B $88.99B 63.88B 59.14B 4.75B 1.65B 506M 2.46B 793M 3.62B 1.13B Gross Income 14.29B 19.82B 25.11B SG&A Expense Income Tax - Current Domestic 13.96B 4.24B 9.72B (506M) (239M) 40M 92M 92M 544M 428M 562M 18.96B 6.11B 12.85B 0 0 0 (250M) 38M 141M 141M 506M 161M 144M 25.37B 8.72B 16.65B 0 0 0 320M 39M 210M 210M (111M) 167M 279M Income Tax - Current Foreign Income Tax - Deferred Domestic 131M (156M) 173M (133M) 204M (136M) Income Tax - Deferred Foreign (109M) (23M) (180M) Income Tax Credits (155M) 0 (39M) 0 (39M) 0 (71M) 0 274M 0 274M 0 37M 0 (241M) 0 (241M) 0 0 0 0 0 0 0 0 0 0 Net Income After Extraordinaries Preferred Dividends Net Income Available to Common (39M) 0 (39M) 274M 0 274M (241M) 0 (241M) EPS (Basic) Basic Shares Outstanding EPS (Diluted) Diluted Shares Outstanding EBITDA -0.09 453M -0.09 453M 2.99B 0.6 457M 0.59 465M 4.11B -0.52 462M -0.52 462M 4.49B Sales/Revenues Cost of Goods Sold (COGS) incl. D&A COGS excluding D&A Depreciation & Amortization Expense Depreciation Amortization of Intangibles Research & Development Other SG&A Other Operating Expense Unusual Expense EBIT after Unusual Expense Non Operating Income/Expense Non-Operating Interest Income Equity in Affiliates (Pretax) Interest Expense Gross Interest Expense Interest Capitalized Pretax Income Income Tax Equity in Affiliates Other After Tax Income (Expense) Consolidated Net Income Minority Interest Expense Net Income Extraordinaries & Discontinued Operations Extra Items & Gain/Loss Sale Of Assets Cumulative Effect Accounting Chg Discontinued Operations Amazon.com Inc. 2012 2013 2014 $11.45B $12.45B $17.42B Cash Only 8.08B 8.66B 14.56B Short-Term Investments 3.36B 3.79B 2.86B 3.36B 4.77B 5.61B 2.6B 3B 3.3B 2.72B 3.15B 3.49B (116M) (153M) (190M) 764M 1.77B 2.31B 6.03B 7.41B 8.3B Finished Goods 0 0 0 Work in Progress 0 0 0 Raw Materials 0 0 0 6.03B 7.41B 8.3B 453M - 0 453M - - Assets Cash & Short Term Investments Total Accounts Receivable Accounts Receivables, Net Accounts Receivables, Gross Bad Debt/Doubtful Accounts Other Receivables Inventories Progress Payments & Other Other Current Assets Miscellaneous Current Assets Total Current Assets 21.3B 2012 Net Property, Plant & Equipment 24.63B 2013 31.33B 2014 7.06B 10.95B 16.97B 9.58B 14.81B 22.73B 2.97B 4.58B 7.15B - - - Computer Software and Equipment 866M 1.1B 1.3B Other Property, Plant & Equipment 174M 231M 304M 2.52B 3.86B 5.76B 151M 520M 886M 99M 482M 811M 0 0 0 3.28B 3.3B 4.08B 2.55B 2.66B 3.32B 725M 645M 764M 648M 538M 971M 648M 538M 971M 32.56B 41.4B 56.34B Property, Plant & Equipment - Gross Buildings Land & Improvements Accumulated Depreciation Total Investments and Advances Other Long-Term Investments Long-Term Note Receivable Intangible Assets Net Goodwill Net Other Intangibles Other Assets Tangible Other Assets Total Assets Liabilities & Shareholders' Equity 2012 ST Debt & Current Portion LT Debt 2013 2014 1.14B 1.74B 3.6B 0 0 0 1.14B 1.74B 3.6B 13.32B 15.13B 16.46B - - - 4.55B 6.11B 8.03B Dividends Payable - - - Accrued Payroll - - - 4.55B 6.11B 8.03B 19B 22.98B 28.09B 3.83B 5.18B 12.49B 3.08B 3.19B 8.27B 3.08B 3.19B 8.27B 0 0 0 746M 1.99B 4.22B - 457M 510M (123M) 344M 750M - 1.81B 2.86B 123M 1.47B 2.11B 1.53B 1.22B 1.66B Short Term Debt Current Portion of Long Term Debt Accounts Payable Income Tax Payable Other Current Liabilities Miscellaneous Current Liabilities Total Current Liabilities Long-Term Debt Long-Term Debt excl. Capitalized Leases Non-Convertible Debt Convertible Debt Capitalized Lease Obligations Provision for Risks & Charges Deferred Taxes Deferred Taxes Credit Deferred Taxes - Debit Other Liabilities Other Liabilities (excl. Deferred Income) 1.42B 1.22B 1.66B Deferred Income 108M - - Total Liabilities 24.36B 31.65B 45.6B Non-Equity Reserves 0 0 0 Preferred Stock (Carrying Value) 0 0 0 Redeemable Preferred Stock 0 0 0 Non-Redeemable Preferred Stock 0 0 0 8.19B 9.75B 10.74B 5M 5M 5M 1.92B 2.19B 1.95B 0 0 0 (250M) (187M) (512M) 11M 2M 1M 0 0 0 (1.84B) (1.84B) (1.84B) 8.19B 9.75B 10.74B 0 0 0 8.19B 9.75B 10.74B 32.56B 41.4B 56.34B Common Equity (Total) Common Stock Par/Carry Value Retained Earnings ESOP Debt Guarantee Cumulative Translation Adjustment/Unrealize d For. Exch. Gain Unrealized Gain/Loss Marketable Securities Revaluation Reserves Treasury Stock Total Shareholders' Equity Accumulated Minority Interest Total Equity Liabilities & Shareholders' Equity Amazon.com Inc. Cash flows from operating activities: Net Income before Extraordinaries Depreciation, Depletion & Amortization 2012 (39M) 2.16B 2013 274M 3.25B 2014 (241M) 4.75B Depreciation and Depletion Amortization of Intangible Assets 1.65B 506M (265M) 2.46B 793M (156M) 3.62B 1.13B (316M) Deferred Taxes Investment Tax Credit (265M) 802M 2.66B 1.52B (861M) 2.07B 275M 4.18B (156M) 1.34B 4.71B 767M (846M) 1.89B 399M 5.48B (316M) 1.68B 5.87B 974M (1.04B) 1.76B 741M 6.84B Deferred Taxes & Investment Tax Credit Other Funds Funds from Operations Extraordinaries Changes in Working Capital Receivables Accounts Payable Other Assets/Liabilities Net Operating Cash Flow Investing Activities 2012 Capital Expenditures 2013 2014 Capital Expenditures (Fixed Assets) (3.79B) (3.79B) (3.44B) (3.44B) (4.89B) (4.89B) Capital Expenditures (Other Assets) 0 0 0 (745M) 935M (3.3B) 4.24B 0 0 (3.6B) (312M) (520M) (2.83B) 2.31B 0 0 (4.28B) (979M) 807M (2.54B) 3.35B 0 0 (5.07B) Net Assets from Acquisitions Sale of Fixed Assets & Businesses Purchase/Sale of Investments Purchase of Investments Sale/Maturity of Investments Other Uses Other Sources Net Investing Cash Flow Financing Activities 2012 Cash Dividends Paid - Total Common Dividends Preferred Dividends Change in Capital Stock Repurchase of Common & Preferred Stk. Sale of Common & Preferred Stock Proceeds from Stock Options Other Proceeds from Sale of Stock Issuance/Reduction of Debt, Net Change in Current Debt Change in Long-Term Debt Issuance of Long-Term Debt Reduction in Long-Term Debt Other Funds Other Uses Other Sources Net Financing Cash Flow Exchange Rate Effect Miscellaneous Funds Net Change in Cash Free Cash Flow 2013 2014 0 0 0 (960M) (960M) 0 0 0 0 0 0 0 0 0 0 0 0 0 2.79B 0 2.79B 3.38B (588M) 429M 0 429M 2.26B (29M) 0 2.82B 395M 0 0 0 (617M) 0 (617M) 394M (1.01B) 78M 0 78M (539M) (86M) 0 574M 2.03B 0 0 0 4.43B 0 4.43B 6.36B (1.93B) 6M 0 6M 4.43B (310M) 0 5.9B 1.95B