NETFLIX INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	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: 000-49802

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)

970 University Avenue, Los Gatos, California 95032

(Address and zip code of principal executive offices)

(408) 317-3700

(Registrant’s telephone number, including area code)

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 x NO ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨.

As of July 19, 2004, there were 52,151,951 shares of the registrant’s common stock, par value $0.001, outstanding.

Table of Contents


			Page
Part I. Financial Information			3

	Item 1.	Financial Statements	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II. Other Information			25

	Item 1.	Legal Proceedings	25

	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	25

	Item 4.	Submission of Matters to a Vote of Security Holders	25

	Item 6.	Exhibits and Reports on Form 8-K	26

Signatures			27

Exhibit Index			28

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Index to Financial Statements


		Page
Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2004		4

Balance Sheets as of December 31, 2003 and June 30, 2004		5

Statements of Cash Flows for the Three and Six Months Ended June 30, 2003 and 2004		6

Notes to Financial Statements		7

Netflix, Inc.

Statements of Operations

(unaudited)

(in thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2004			June 30, 2003			June 30, 2004
Revenues:
Subscription	$	63,071		$	119,710		$	118,352		$	219,533
Sales		116			611			504			1,158

Total revenues		63,187			120,321			118,856			220,691
Cost of revenues:
Subscription		35,148			69,604			65,076			126,048
Sales		93			184			172			367

Total cost of revenues		35,241			69,788			65,248			126,415

Gross profit		27,946			50,533			53,608			94,276
Operating expenses:
Fulfillment*		7,221			14,373			13,604			25,163
Technology and development*		4,123			5,652			8,306			10,691
Marketing*		9,957			20,477			23,164			47,170
General and administrative*		2,093			3,280			4,341			6,416
Stock-based compensation		1,704			4,134			4,110			8,569

Total operating expenses		25,098			47,916			53,525			98,009

Operating income (loss)		2,848			2,617			83			(3,733	)
Other income (expense):
Interest and other income		560			304			1,141			895
Interest and other expense		(95	)		(30	)		(286	)		(61	)

Net income (loss)	$	3,313		$	2,891		$	938		$	(2,899	)

Net income (loss) per share:
Basic	$	0.07		$	0.06		$	0.02		$	(0.06	)

Diluted	$	0.05		$	0.04		$	0.02		$	(0.06	)

Weighted-average common shares outstanding:
Basic		47,296			51,898			46,385			51,590

Diluted		61,624			64,975			60,272			51,590

* Amortization of stock-based compensation not included in expense line items:

Fulfillment	$	207		$	465		$	540		$	976
Technology and development		654			1,866			1,489			3,492
Marketing		269			582			697			1,146
General and administrative		574			1,221			1,384			2,955

Total stock-based compensation	$	1,704		$	4,134		$	4,110		$	8,569

See accompanying notes to financial statements.

Netflix, Inc.

Balance Sheets

(unaudited)

(in thousands, except share and par value data)


	As of
	December 31, 2003			June 30, 2004
Assets
Current assets:
Cash and cash equivalents	$	89,894		$	153,444
Short-term investments		45,297			—
Prepaid expenses		2,231			2,422
Prepaid revenue sharing expenses		905			2,214
Other current assets		619			641

Total current assets		138,946			158,721
DVD library, net		22,238			30,256
Intangible assets, net		2,948			1,868
Property and equipment, net		9,772			11,053
Deposits		1,272			1,481
Other assets		836			814

Total assets	$	176,012		$	204,193

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	32,654		$	42,552
Accrued expenses		11,625			13,852
Deferred revenue		18,324			25,251
Current portion of capital lease obligations		416			253

Total current liabilities		63,019			81,908
Deferred rent		241			379
Capital lease obligations, less current portion		44			—

Total liabilities		63,304			82,287
Stockholders’ equity:
Common stock, $0.001 par value; 80,000,000 and 160,000,000 shares authorized at December 31, 2003 and June 30, 2004, respectively; 50,849,370 and 52,121,300 shares issued and outstanding at December 31, 2003 and June 30, 2004, respectively		51			52
Additional paid-in capital		270,836			282,278
Deferred stock-based compensation		(5,482	)		(4,232	)
Accumulated other comprehensive income		596			—
Accumulated deficit		(153,293	)		(156,192	)

Total stockholders’ equity		112,708			121,906

Total liabilities and stockholders’ equity	$	176,012		$	204,193

See accompanying notes to financial statements.

Netflix, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2004			June 30, 2003			June 30, 2004
Cash flows from operating activities:
Net income (loss)	$	3,313		$	2,891		$	938		$	(2,899	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment		1,140			1,323			2,473			2,575
Amortization of DVD library		9,392			21,141			16,012			39,268
Amortization of intangible assets		808			454			1,617			1,080
Stock-based compensation expense		1,704			4,134			4,110			8,569
Loss on disposal of short-term investments		—			274			—			274
Gain on disposal of DVDs		(94	)		(427	)		(461	)		(791	)
Non-cash interest expense		36