Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Results of Operations
The following represents our consolidated performance highlights:
As of/Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except revenue per membership and percentages)
Financial Results:
Streaming revenues $ 33,640,458 $ 31,469,852 $ 29,515,496 7 %
DVD revenues (1) 82,839 145,698 182,348 (43) %
Total revenues $ 33,723,297 $ 31,615,550 $ 29,697,844 7 %
Operating income $ 6,954,003 $ 5,632,831 $ 6,194,509 23 %
Operating margin 21 % 18 % 21 %
Global Streaming Memberships:
Paid net membership additions 29,529 8,903 18,181 232 %
Paid memberships at end of period 260,276 230,747 221,844 13 %
Average paying memberships 240,889 222,924 210,784 8 %
Average monthly revenue per paying membership $ 11.64 $ 11.76 $ 11.67 (1) %
(1) In April 2023, we announced our plans to discontinue our DVD-by-mail service, and we ceased providing our mailing services to customers on September 29, 2023. The discontinuance of our DVD business had an immaterial impact on our operations and financial results.
Consolidated revenues for the year ended December 31, 2023 increased 7% as compared to the year ended December 31, 2022. Operating margin for the year ended December 31, 2023 increased three percentage points, primarily due to revenues growing at a faster rate as compared to the growth in cost of revenues and marketing and decreased technology and development expenses, partially offset by higher growth in general and administrative expenses as compared to the growth in revenues.
Streaming Revenues
We primarily 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 December 31, 2023, pricing on our paid plans ranged from the U.S. dollar equivalent of $1 to $28 per month, and pricing on our extra member sub accounts ranged from the U.S. dollar equivalent of $2 to $8 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.
We also earn revenue from advertisements presented on our streaming service, consumer products and various other sources. Revenues earned from sources other than monthly membership fees were not material for the years ended December 31, 2023, 2022, and 2021.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Streaming revenues
$ 33,640,458 $ 31,469,852 $ 29,515,496 $ 2,170,606 7 %
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Streaming revenues for the year ended December 31, 2023 increased 7% as compared to the year ended December 31, 2022, primarily due to the 8% growth in average paying memberships, partially offset by a 1% decrease in average monthly revenue per paying membership. The decrease in average monthly revenue per paying membership was primarily due to changes in plan mix, higher membership growth in regions with lower average monthly revenue per paying membership, partially offset by limited price increases. Additionally, streaming revenues for the year ended December 31, 2023 were further impacted by unfavorable fluctuations in foreign exchange rates.
The following tables summarize streaming revenue and other streaming membership information by region for the years ended December 31, 2023, 2022 and 2021.
United States and Canada (UCAN)
As of/Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except revenue per membership and percentages)
Revenues $ 14,873,783 $ 14,084,643 $ 12,972,100 $ 789,140 6 %
Paid net membership additions (losses) 5,832 (919) 1,279 6,751 735 %
Paid memberships at end of period (1) 80,128 74,296 75,215 5,832 8 %
Average paying memberships 76,126 74,001 74,234 2,125 3 %
Average monthly revenue per paying membership $ 16.28 $ 15.86 $ 14.56 $ 0.42 3 %
Constant currency change (2) 3 %
Europe, Middle East, and Africa (EMEA)
As of/Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except revenue per membership and percentages)
Revenues $ 10,556,487 $ 9,745,015 $ 9,699,819 $ 811,472 8 %
Paid net membership additions 12,084 2,693 7,338 9,391 349 %
Paid memberships at end of period (1) 88,813 76,729 74,036 12,084 16 %
Average paying memberships 80,928 73,904 69,518 7,024 10 %
Average monthly revenue per paying membership $ 10.87 $ 10.99 $ 11.63 $ (0.12) (1) %
Constant currency change (2) (1) %
Latin America (LATAM)
As of/Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except revenue per membership and percentages)
Revenues $ 4,446,461 $ 4,069,973 $ 3,576,976 $ 376,488 9 %
Paid net membership additions 4,298 1,738 2,424 2,560 147 %
Paid memberships at end of period (1) 45,997 41,699 39,961 4,298 10 %
Average paying memberships 42,802 40,000 38,573 2,802 7 %
Average monthly revenue per paying membership $ 8.66 $ 8.48 $ 7.73 $ 0.18 2 %
Constant currency change (2) 10 %
Asia-Pacific (APAC)
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As of/Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except revenue per membership and percentages)
Revenues $ 3,763,727 $ 3,570,221 $ 3,266,601 $ 193,506 5 %
Paid net membership additions 7,315 5,391 7,140 1,924 36 %
Paid memberships at end of period (1) 45,338 38,023 32,632 7,315 19 %
Average paying memberships 41,033 35,019 28,461 6,014 17 %
Average monthly revenue per paying membership $ 7.64 $ 8.50 $ 9.56 $ (0.86) (10) %
Constant currency change (2) (6) %
(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.
(2) We believe the non-GAAP financial measure of constant currency revenue is useful in analyzing the underlying trends in average monthly revenue per paying membership absent foreign currency fluctuations. However, this non-GAAP financial measure should be considered in addition to, not as a substitute for, or superior to other financial measures prepared in accordance with GAAP. In order to exclude the effect of foreign currency rate fluctuations on average monthly revenue per paying membership, we estimate current period revenue assuming foreign exchange rates had remained constant with foreign exchange rates from each of the corresponding months of the prior-year period. For the year ended December 31, 2023, our revenues would have been approximately $597 million higher had foreign currency exchange rates remained constant with those for the year ended December 31, 2022.
Cost of Revenues
Amortization of content assets makes up the majority of cost of revenues. Expenses directly associated with the acquisition, licensing and production of content (such as payroll, stock-based compensation, facilities, and other related personnel expenses, costs associated with obtaining rights to music included in our content, overall deals with talent, miscellaneous production related costs and participations and residuals), streaming delivery costs and other operations costs make up the remainder of cost of revenues. We have built our own global content delivery network (“Open Connect”) to help us efficiently stream a high volume of content to our members over the internet. Delivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs, such as cloud computing costs, associated with delivering content over the internet. Other operations costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs directly incurred in making our content available to members.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Cost of revenues $ 19,715,368 $ 19,168,285 $ 17,332,683 $ 547,083 3 %
As a percentage of revenues 58 % 61 % 58 %
The increase in cost of revenues for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was due to a $171 million increase in content amortization relating to our existing and new content, coupled with a $376 million increase in other cost of revenues primarily due to an increase in expenses directly associated with the acquisition, licensing and production of content.
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing and advertising sales partners, including consumer electronics ("CE") manufacturers, multichannel video programming distributors ("MVPDs"), mobile operators and ISPs. Advertising expenses include promotional activities such as digital and television advertising. Marketing expenses also include payroll, stock-based compensation, facilities, and other related expenses for personnel that support sales and marketing activities.
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Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Marketing $ 2,657,883 $ 2,530,502 $ 2,545,146 $ 127,381 5 %
As a percentage of revenues 8 % 8 % 9 %
The increase in marketing expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to a $146 million increase in advertising expenses and a $21 million increase in personnel-related costs, partially offset by a $39 million decrease in payments to our marketing partners.
Technology and Development
Technology and development expenses consist primarily of payroll, stock-based compensation, facilities, and other related expenses for technology personnel responsible for making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendations, merchandising and infrastructure. Technology and development expenses also include costs associated with general use computer hardware and software.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Technology and development $ 2,675,758 $ 2,711,041 $ 2,273,885 $ (35,283) (1) %
As a percentage of revenues 8 % 9 % 8 %
Technology and development expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 remained relatively flat.
General and Administrative
General and administrative expenses consist of payroll, stock-based compensation, facilities, and other related expenses for corporate personnel. General and administrative expenses also include professional fees and other general corporate expenses.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
General and administrative $ 1,720,285 $ 1,572,891 $ 1,351,621 $ 147,394 9 %
As a percentage of revenues 5 % 5 % 5 %
The increase in general and administrative expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to a $82 million increase in third-party expenses and a $78 million increase in personnel-related costs.
Interest Expense
Interest expense consists primarily of the interest associated with our outstanding debt obligations, including the amortization of debt issuance costs. See Note 6 Debt in the accompanying notes to our consolidated financial statements for further detail on our debt obligations.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Interest expense $ 699,826 $ 706,212 $ 765,620 $ (6,386) (1) %
As a percentage of revenues 2 % 2 % 3 %
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Interest expense for the year ended December 31, 2023 consisted primarily of $698 million of interest on our Notes. Interest expense for the year ended December 31, 2023 as compared to the year ended December 31, 2022 remained relatively flat.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of foreign exchange gains and losses on foreign currency denominated balances and interest earned on cash, cash equivalents and short-term investments.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Interest and other income (expense) $ (48,772) $ 337,310 $ 411,214 $ (386,082) (114) %
As a percentage of revenues — % 1 % 1 %
Interest and other income (expense) decreased primarily due to foreign exchange losses of $293 million for the year ended December 31, 2023 as compared to a gain of $282 million for the year ended December 31, 2022. The foreign exchange loss in the year ended December 31, 2023 was primarily driven by the non-cash loss of $176 million from the remeasurement of our Senior Notes denominated in euros, coupled with the remeasurement of cash and content liability positions in currencies other than the functional currencies. The foreign exchange gain in the year ended December 31, 2022 was primarily driven by the non-cash $353 million gain from the remeasurement of our Senior Notes denominated in euros, partially offset by the remeasurement of cash and content liability positions in currencies other than the functional currencies. The change in foreign currency gains and losses was partially offset by a $221 million increase in interest income earned due to higher average interest rates and investment balances for the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Provision for Income Taxes
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands, except percentages)
Provision for income taxes $ 797,415 $ 772,005 $ 723,875 $ 25,410 3 %
Effective tax rate 13 % 15 % 12 %
The decrease in our effective tax rate for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily due to a decrease in foreign taxes. See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes.
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Liquidity and Capital Resources
As of December 31,
Change
2023 2022 2023 vs. 2022
(in thousands, except percentages)
Cash, cash equivalents, restricted cash and short-term investments $ 7,139,488 $ 6,081,858 $ 1,057,630 17 %
Short-term and long-term debt 14,543,261 14,353,076 190,185 1 %
Cash, cash equivalents, restricted cash and short-term investments increased $1,058 million in the year ended December 31, 2023 primarily due to cash provided by operations, partially offset by the repurchase of stock.
Debt, net of debt issuance costs, increased $190 million primarily due to the remeasurement of our euro-denominated notes. The amount of principal and interest due in the next twelve months is $1,077 million. The amount of principal and interest due beyond the next twelve months is $16,662 million. As of December 31, 2023, no amounts had been borrowed under our $1 billion Revolving Credit Agreement. See Note 6 Debt in the accompanying notes to our consolidated financial statements.
We anticipate that our future capital needs from the debt market will be more limited compared to prior years. Our ability to obtain this or any additional financing that we may choose or need, including for potential strategic acquisitions and investments, will depend on, among other things, our development efforts, business plans, operating performance, and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. If we raise additional funds through the issuance of equity or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.
In March 2021, our Board of Directors authorized the repurchase of up to $5 billion of our 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. We are 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 our stock price, general economic, business and market conditions, and alternative investment opportunities. We may discontinue any repurchases of our common stock at any time without prior notice. In the fiscal year ended December 31, 2023, the Company repurchased 14,513,790 shares of common stock for an aggregate amount of $6,045 million. As of December 31, 2023, $8.4 billion remains available for repurchases.
Our primary uses of cash include the acquisition, licensing and production of content, marketing programs, streaming delivery and personnel-related costs, as well as strategic acquisitions and investments. Cash payment terms for non-original content have historically been in line with the amortization period. Investments in original content, and in particular content that we produce and own, require more cash upfront relative to licensed content. For example, production costs are paid as the content is created, well in advance of when the content is available on the service and amortized. We expect to continue to significantly invest in global content, particularly in original content, which will impact our liquidity. We currently anticipate that cash flows from operations, available funds and access to financing sources, including our revolving credit facility, will continue to be sufficient to meet our cash needs for the next twelve months and beyond.
Our material cash requirements from known contractual and other obligations primarily relate to our content, debt and lease obligations. As of December 31, 2023, the expected timing of those payments are as follows:
Contractual obligations (in thousands): Total Next 12 Months Beyond 12 Months
Content obligations (1) $ 21,713,349 $ 10,328,923 $ 11,384,426
Debt (2) 17,739,159 1,077,261 16,661,898
Operating lease obligations (3) 3,088,899 513,506 2,575,393
Total $ 42,541,407 $ 11,919,690 $ 30,621,717
(1) As of December 31, 2023, content obligations were comprised of $4.5 billion included in "Current content liabilities" and $2.6 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $14.6 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not then meet the criteria for recognition.
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Content obligations include amounts related to the acquisition, licensing and production of content. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements and other production related commitments. An obligation for the acquisition and licensing of content is incurred at the time we enter 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 these types of agreements. The contractual obligations table above does not include any estimated obligation for the unknown future titles, payment for which could range from less than one year to more than five years. However, these unknown obligations are expected to be significant and we believe could include approximately $1 billion to $4 billion over the next three years, with the payments for the vast majority of such amounts expected to occur after the next twelve months. The foregoing range is based on considerable management judgments and the actual amounts may differ. Once we know the title that we will receive and the license fees, we include the amount in the contractual obligations table above.
(2) Debt obligations include our Notes consisting of principal and interest payments. See Note 6 Debt in the accompanying notes to our consolidated financial statements for further details.
(3) Operating lease obligations are comprised of operating lease liabilities included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Consolidated Balance Sheets, inclusive of imputed interest. Operating lease obligations also include additional obligations that are not reflected on the Consolidated Balance Sheets as they did not meet the criteria for recognition. As of December 31, 2023, the Company has additional operating leases for real estate that have not yet commenced of $343 million which has been included above. See Note 5 Balance Sheet Components in the accompanying notes to our consolidated financial statements for further details regarding leases.
In addition, as of December 31, 2023, we had gross unrecognized tax benefits of $327 million, of which $221 million was classified in “Other non-current liabilities" in the Consolidated Balance Sheets. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
Free Cash Flow
We define free cash flow as cash provided by (used in) operating activities less purchases of property and equipment and change in other assets. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make strategic acquisitions and investments and for certain other activities like stock repurchases. Free cash flow is considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, net cash provided by operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.
In assessing liquidity in relation to our results of operations, we compare free cash flow to net income, noting that the major recurring differences are the timing impact between content payments and amortization, non-cash stock-based compensation expense, non-cash remeasurement gain/loss on our euro-denominated debt, excess property and equipment purchases over depreciation, and other working capital differences. Working capital differences primarily include deferred revenue, taxes and semi-annual interest payments on our outstanding debt. Our receivables from members generally settle quickly.
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022
(in thousands)
Net cash provided by operating activities
$ 7,274,301 $ 2,026,257 $ 392,610 $ 5,248,044 259 %
Net cash provided by (used in) investing activities
541,751 (2,076,392) (1,339,853) 2,618,143 126 %
Net cash used in financing activities
(5,950,803) (664,254) (1,149,776) 5,286,549 796 %
Non-GAAP reconciliation of free cash flow:
Net cash provided by operating activities
7,274,301 2,026,257 392,610 5,248,044 259 %
Purchases of property and equipment (348,552) (407,729) (524,585) (59,177) (15) %
Change in other assets
— — (26,919) — — %
Free cash flow
$ 6,925,749 $ 1,618,528 $ (158,894) $ 5,307,221 328 %
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Net cash provided by operating activities increased $5,248 million from the year ended December 31, 2022 to $7,274 million for the year ended December 31, 2023. The increase in net cash provided by operating activities was primarily driven by a decrease in payments for content assets, coupled with a $916 million or 20% increase in net income and favorable changes in working capital. The payments for content assets decreased $3,519 million, from $16,660 million to $13,140 million, or 21%.
Net cash provided by (used in) investing activities increased $2,618 million from the year ended December 31, 2022 to $542 million for the year ended December 31, 2023. The increase in net cash provided by (used in) investing activities is primarily due to proceeds from the maturities of short-term investments, net of purchases, and there being no acquisitions in the year ended December 31, 2023, as compared to acquisitions for an aggregate amount of $757 million in the year ended December 31, 2022.
Net cash used in financing activities increased $5,287 million from the year ended December 31, 2022 to $5,951 million for the year ended December 31, 2023. The increase in net cash used in financing activities is primarily due to repurchases of common stock for an aggregate amount of $6,045 million in the year ended December 31, 2023, as compared to no repurchases of common stock in the year ended December 31, 2022, partially offset by the absence of debt maturities in the year ended December 31, 2023 as compared to the repayment upon maturity of the $700 million aggregate principal amount of our 5.500% Senior Notes in February 2022.
Free cash flow was $1,518 million higher than net income for the year ended December 31, 2023 primarily due to $1,057 million of amortization expense exceeding cash payments for content assets, $339 million of non-cash stock-based compensation expense, $176 million of non-cash remeasurement loss on our euro-denominated debt, and $47 million in other favorable working capital differences, partially offset by $101 million of property and equipment purchases exceeding depreciation expense.
Indemnifications
The information set forth under Note 8 Commitments and Contingencies in the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K is incorporated herein by reference.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and Exchange Commission ("SEC") has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Content
We acquire, license and produce content, including original programming, in order to offer our members unlimited viewing of video entertainment. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to content assets and the changes in related liabilities, are classified within "Net cash provided by operating activities" on the Consolidated Statements of Cash Flows.
We recognize content assets (licensed and produced) as "Content assets, net" on the Consolidated Balance Sheets. For licensed content, we capitalize the fee per title and record a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known and the title is accepted and available for streaming. For produced content, we capitalize costs associated with the production, including development costs, direct costs and production overhead. Participations and residuals are expensed in line with the amortization of production costs.
Based on factors including historical and estimated viewing patterns, we amortize the content assets (licensed and produced) in “Cost of revenues” on the Consolidated Statements of Operations over the shorter of each title's contractual window of availability or estimated period of use or ten years, beginning with the month of first availability. The amortization is on an accelerated basis, as we typically expect more upfront viewing, and film amortization is more accelerated than TV series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized within four years
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after its month of first availability. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable management judgment.
In the normal course of business, we, or a third-party producing content on our behalf, may qualify for tax incentives through eligible spend on productions. The accounting for tax incentives is dependent on the particular type of incentive, including the nature of the benefit and the location the incentive is earned. In general, tax incentives are realized as cash receipts and may be received prior to or after a title launches on our service. Upon a title’s launch, any amounts we are eligible for through qualified production spend but have not received, are recognized in “Other current assets” or “Other non-current assets” on the Consolidated Balance Sheets as receivables. Tax incentives are generally accounted for as a reduction to the cost basis of content assets (presented in “Content assets, net”) and reduce content amortization over the life of the title (as presented in “Cost of revenues”) on the Consolidated Statements of Operations.
Our business model is subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and produced) are predominantly monetized as a group and therefore are reviewed at a group level when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than unamortized cost. To date, we have not identified any such event or changes in circumstances. If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance when it is more likely than not they will not be realized.
Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business. Actual operating results in future years could differ from our current assumptions, judgments and estimates.
We do not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates.
See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes.
Recent Accounting Pronouncements
The information set forth under Note 1 to the consolidated financial statements under the caption “Basis of Presentation and Summary of Significant Accounting Policies” is incorporated herein by reference.