NETFLIX INC - FORM 8-K - EX-99.1 - PRESS RELEASE

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8-K - FORM 8-K - NETFLIX INC	d8k.htm
EX-99.2 - MANAGEMENT'S COMMENTARY ON FINANCIAL RESULTS - NETFLIX INC	dex992.htm

Exhibit 99.1

LOGO


FOR IMMEDIATE RELEASE	IR CONTACT:	Deborah Crawford
Wednesday, January 27, 2010		VP, Investor Relations
		(408) 540-3712

	PR CONTACT:	Steve Swasey
		VP, Corporate Communications
		(408) 540-3947

Netflix Announces Q4 2009 Financial Results

Subscribers – 12.3 million

Revenue – $444.5 million

GAAP Net Income – $30.9 million

GAAP EPS – $0.56 per diluted share

LOS GATOS, Calif., January 27, 2010 – Netflix, Inc. (Nasdaq: NFLX) today reported results for the fourth quarter and year ended December 31, 2009.

“Adding more than one million net new subscribers in the fourth quarter and nearly three million over the full year highlights the growing appeal of the Netflix service as we further expand access to and adoption of streaming movies and TV episodes over the Internet,” said Reed Hastings, Netflix co-founder and chief executive officer. “In 2010, we expect to extend our operating momentum as we grow the business both rapidly and profitably.”

Earnings Call Format

Netflix is changing the format of the company’s fourth quarter earnings conference call. The call will consist solely of Q&A. In conjunction with the press release, the company has posted a written version of management’s commentary to its Web site at http://ir.netflix.com. The conference call will be webcast today at 6:00 p.m. Eastern Time / 3:00 p.m. Pacific Time. If the format change is well received, future earnings calls will follow the same format. Please see conference call details below.

Fourth-Quarter and Fiscal-Year 2009 Financial Highlights

Subscribers. Netflix ended the fourth quarter of 2009 with approximately 12,268,000 total subscribers, representing 31 percent year-over-year growth from 9,390,000 total subscribers at the end of the fourth quarter of 2008 and 10 percent sequential growth from 11,109,000 subscribers at the end of the third quarter of 2009.

Net subscriber change in the quarter was an increase of 1,159,000 compared to an increase of 718,000 for the same period of 2008 and an increase of 510,000 for the third quarter of 2009.

Gross subscriber additions for the quarter totaled 2,803,000, representing 34 percent year-over-year growth from 2,085,000 gross subscriber additions in the fourth quarter of 2008 and 29 percent quarter-over-quarter growth from 2,180,000 gross subscriber additions in the third quarter of 2009.

Of the 12,268,000 total subscribers at quarter end, 97 percent, or 11,892,000, were paid subscribers. The other 3 percent, or 376,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the fourth quarter of 2008 and at the end of the third quarter of 2009.

Revenue for the fourth quarter of 2009 was $444.5 million, representing 24 percent year-over-year growth from $359.6 million for the fourth quarter of 2008, and a 5 percent sequential increase from $423.1 million for the third quarter of 2009. Revenue for fiscal 2009 was $1.67 billion, up 22 percent from $1.365 billion for fiscal 2008.

Gross margin¹ for the fourth quarter of 2009 was 38.0 percent compared to 35.2 percent for the fourth quarter of 2008 and 34.9 percent for the third quarter of 2009. Gross margin for fiscal 2009 was 35.4 percent compared to 33.3 percent for fiscal 2008.

GAAP net income for the fourth quarter of 2009 was $30.9 million, or $0.56 per diluted share compared to GAAP net income of $22.7 million, or $0.38 per diluted share, for the fourth quarter of 2008 and GAAP net income of $30.1 million, or $0.52 per diluted share, for the third quarter of 2009. GAAP net income grew 36 percent on a year-over-year basis and GAAP EPS grew 47 percent on a year-over-year basis.

GAAP net income for fiscal 2009 was $115.9 million, or $1.98 per diluted share compared to GAAP net income of $83.0 million, or $1.32 per diluted share, for fiscal 2008. GAAP net income grew 40 percent on a year-over-year basis and GAAP EPS grew 50 percent on a year-over-year basis.

Non-GAAP net income was $32.7 million, or $0.59 per diluted share, for the fourth quarter of 2009 compared to non-GAAP net income of $24.6 million, or $0.41 per diluted share, for the fourth quarter of 2008 and non-GAAP net income of $32.1 million, or $0.55 per diluted share, for the third quarter of 2009. Non-GAAP net income grew 33 percent on a year-over-year basis and non-GAAP EPS grew 44 percent on a year-over-year basis.

Non-GAAP net income was $123.5 million, or $2.11 per diluted share, for fiscal 2009 compared to non-GAAP net income of $90.7 million, or $1.44 per diluted share, for fiscal 2008. Non-GAAP net income grew 36 percent on a year-over-year basis and non-GAAP EPS grew 47 percent on a year-over-year basis.

Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense, net of taxes.

Stock-based compensation was $3.0 million for the fourth quarter of 2009, compared to $3.2 million for the fourth quarter of 2008 and for the third quarter of 2009. Stock-based compensation for fiscal 2009 was $12.6 million compared to $12.3 million for fiscal 2008. Stock-based compensation is presented in the same lines of the Consolidated Statements of Operations as cash compensation paid to the same individuals.

Subscriber acquisition cost² for the fourth quarter of 2009 was $25.23 per gross subscriber addition compared to $26.67 for the same period of 2008 and $26.86 for the third quarter of 2009. Subscriber acquisition cost for fiscal 2009 was $25.48 per gross subscriber addition compared to $29.12 for fiscal 2008.

¹	Gross margin is defined as revenues less cost of subscription and fulfillment expenses divided by revenues.

²	Subscriber acquisition cost is defined as the total marketing expense, which includes stock-based compensation for marketing personnel, on the Company’s Consolidated Statements of Operations divided by total gross subscriber additions during the quarter.

Churn³ for the fourth quarter of 2009 was 3.9 percent compared to 4.2 percent for the fourth quarter of 2008 and 4.4 percent for the third quarter of 2009. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the fourth quarter of 2009 was 48 percent compared to 28 percent for the same period of 2008 and 41 percent for the third quarter of 2009.

Free cash flow⁴ for the fourth quarter of 2009 was $30.2 million compared to $51.0 million in the fourth quarter of 2008 and $25.5 million for the third quarter of 2009. Free cash flow for fiscal 2009 was $97.1 million compared to $94.7 million in fiscal 2008.

Cash provided by operating activities for the fourth quarter of 2009 was $105.8 million compared to $92.1 million for the fourth quarter of 2008 and $78.3 million for the third quarter of 2009. Cash provided by operating activities for fiscal 2009 was $325.1 million compared to $284.0 million for fiscal 2008.

Business Outlook

The Company’s performance expectations for the first quarter of 2010 and full-year 2010 are as follows:

First-Quarter 2010

•

Ending subscribers of 13.5 million to 13.8 million

•

Revenue of $490 million to $496 million

•

GAAP net income of $26 million to $32 million

•

GAAP EPS of $0.47 to $0.58 per diluted share

Full-Year 2010

•

Ending subscribers of 15.5 million to 16.3 million

•

Revenue of $2.05 billion to $2.11 billion

•

GAAP net income of $125 million to $137 million

•

GAAP EPS of $2.28 to $2.50 per diluted share

Earnings Call

The Company has posted a written version of management’s commentary to its Web site at http://ir.netflix.com. Therefore, the conference call, which will be webcast today at 6:00 p.m. Eastern Time / 3:00 p.m. Pacific Time, will consist solely of Q&A, with questions submitted via email. Please email your questions to dcrawford@netflix.com. The company will read the questions aloud on the call and respond to as many questions as possible. All media inquiries should be directed to Steve Swasey at (408) 540-3947or sswasey@netflix.com.

Following completion of the call, a replay of the webcast will be available at http://ir.netflix.com. The telephone replay of the call will be available from approximately 6:00 p.m. Pacific Time on January 27, 2010 through midnight on February 2, 2010. To listen to a replay, call (719) 457-0820, access code 5243602.

³	Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then divided by three months.

⁴	Free cash flow is defined as cash provided by operating activities and investing activities excluding the non-operational cash flows from purchases and sales of short-term investments and cash flows from investment in business.

Use of Non-GAAP Measures

Management believes that non-GAAP net income is a useful measure of operating performance because it excludes the non-cash impact of stock option accounting. In addition, management believes that free cash flow is a useful measure of liquidity because it excludes the non-operational cash flows from purchases and sales of short-term investments, cash flows from investment in business and cash flows from financing activities. However, these non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net income and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. A reconciliation to the GAAP equivalents of these non-GAAP measures is contained in tabular form on the attached unaudited financial statements.

About Netflix

With more than 12 million members, Netflix, Inc. (Nasdaq: NFLX) is the world’s largest subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail. For $8.99 a month, Netflix members can instantly watch unlimited TV episodes and movies streamed to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes. With Netflix, there are never any due dates or late fees. Members can select from a growing library of titles that can be watched instantly and a vast array of titles on DVD. Among the large and expanding base of devices that can stream movies and TV episodes from Netflix right to members’ TVs are Microsoft’s Xbox 360 and Sony’s PS3 game consoles and, this spring, Nintendo’s Wii console; Blu-ray disc players from Samsung, LG and Insignia; Internet TVs from LG, Sony and VIZIO; the Roku digital video player and TiVo digital video recorders. For more information, visit http://www.netflix.com.

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding our subscriber growth, revenue, GAAP net income and earnings per share for the first quarter of 2010 and the full-year 2010. The forward-looking statements in this release are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new subscribers and retain existing subscribers; our ability to manage our subscriber acquisition cost as well as the cost of content delivered to our subscribers; fluctuations in consumer usage of our service; the continued availability of content on terms and conditions acceptable to us; maintenance and expansion of device platforms for instant streaming; continued weakness in the U.S. economy and its affect on online commerce or the filmed entertainment industry; conditions that effect our delivery through the U.S. Postal Service, including regulatory changes and postal rate increases; changes in the costs of acquiring DVDs or electronic content; consumer spending on DVDs and related products; disruption in service on our website or with our computer systems; competition and widespread consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2009. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

Netflix, Inc.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)


	Three Months Ended									Twelve Months Ended
	December 31, 2009			September 30, 2009			December 31, 2008			December 31, 2009			December 31, 2008
Revenues	$	444,542		$	423,120		$	359,595		$	1,670,269		$	1,364,661
Cost of revenues:
Subscription		231,598			233,091			193,635			909,461			761,133
Fulfillment expenses *		43,888			42,183			39,211			169,810			149,101

Total cost of revenues		275,486			275,274			232,846			1,079,271			910,234

Gross profit		169,056			147,846			126,749			590,998			454,427
Operating expenses:
Technology and development *		33,209			30,014			24,052			114,542			89,873
Marketing *		70,715			58,556			55,617			237,744			199,713
General and administrative *		13,524			11,543			10,762			51,333			49,662
Gain on disposal of DVDs		(1,741	)		(1,604	)		(1,603	)		(4,560	)		(6,327	)

Total operating expenses		115,707			98,509			88,828			399,059			332,921

Operating income		53,349			49,337			37,921			191,939			121,506
Other income (expense):
Interest expense		(4,457	)		(674	)		(677	)		(6,475	)		(2,458	)
Interest and other income (expense)		2,444			1,808			852			6,728			12,452

Income before income taxes		51,336			50,471			38,096			192,192			131,500
Provision for income taxes		20,423			20,330			15,364			76,332			48,474

Net income	$	30,913		$	30,141		$	22,732		$	115,860		$	83,026

Net income per share:
Basic	$	0.58		$	0.54		$	0.39		$	2.05		$	1.36
Diluted	$	0.56		$	0.52		$	0.38		$	1.98		$	1.32
Weighted average common shares outstanding:
Basic		53,609			56,146			58,906			56,560			60,961
Diluted		55,479			57,938			60,311			58,416			62,836

* Stock-based compensation included in expense line items:
Fulfillment expenses	$	59		$	99		$	126		$	380		$	466
Technology and development		1,023			1,169			1,095			4,453			3,890
Marketing		433			452			462			1,786			1,886
General and administrative		1,461			1,512			1,511			5,999			6,022

Reconciliation of Non-GAAP Financial Measures
(unaudited)
Non-GAAP net income reconciliation:
GAAP net income	$	30,913		$	30,141		$	22,732		$	115,860		$	83,026
Stock-based compensation		2,976			3,232			3,194			12,618			12,264
Income tax effect of stock-based compensation		(1,184	)		(1,302	)		(1,287	)		(5,017	)		(4,585	)

Non-GAAP net income	$	32,705		$	32,071		$	24,639		$	123,461		$	90,705

Non-GAAP net income per share:
Basic	$	0.61		$	0.57		$	0.42		$	2.18		$	1.49
Diluted	$	0.59		$	0.55		$	0.41		$	2.11		$	1.44
Weighted average common shares outstanding:
Basic		53,609			56,146			58,906			56,560			60,961
Diluted		55,479			57,938			60,311			58,416			62,836

Netflix, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)


	As of
	December 31, 2009		December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	134,224	$	139,881
Short-term investments		186,018		157,390
Prepaid expenses		12,491		8,122
Prepaid revenue sharing expenses		17,133		18,417
Current content library, net		37,329		18,691
Other assets		23,818		16,424

Total current assets		411,013		358,925
Content library, net		108,810		98,547
Property and equipment, net		131,653		124,948
Deferred tax assets		15,958		22,409
Other non-current assets		12,300		10,595

Total assets	$	679,734	$	615,424

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	91,475	$	100,344
Accrued expenses		33,387		31,394
Current portion of lease financing obligations		1,410		1,152
Deferred revenue		100,097		83,127

Total current liabilities		226,369		216,017
Long-term debt		200,000		—
Lease financing obligations, excluding current portion		36,572		37,988
Other non-current liabilities		17,650		14,264

Total liabilities		480,591		268,269
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 2009 and 2008; 53,440,073 and 58,862,478 issued and outstanding at December 31, 2009 and 2008, respectively		53		62
Additional paid-in capital		—		338,577
Treasury stock at cost (3,491,084 shares at December 31, 2008)		—		(100,020	)
Accumulated other comprehensive income, net		273		84
Retained earnings		198,817		108,452

Total stockholders’ equity		199,143		347,155

Total liabilities and stockholders’ equity	$	679,734	$	615,424

Netflix, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended									Twelve Months Ended
	December 31, 2009			September 30, 2009			December 31, 2008			December 31, 2009			December 31, 2008
Cash flows from operating activities:
Net income	$	30,913		$	30,141		$	22,732		$	115,860		$	83,026
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and intangibles		10,238			9,618			9,141			38,044			32,454
Amortization of content library		60,261			56,690			47,579			219,490			209,757
Amortization of discounts and premiums on investments		168			126			184			607			625
Amortization of debt issuance costs		1,124			—			—			1,124			—
Stock-based compensation expense		2,976			3,232			3,194			12,618			12,264
Excess tax benefits from stock-based compensation		(3,584	)		(1,600	)		(753	)		(12,683	)		(5,220	)
Loss on disposal of property and equipment		—			—			—			254			101
(Gain) loss on sale of short-term investments		(54	)		(984	)		618			(1,509	)		(3,130	)
Gain on disposal of DVDs		(2,607	)		(2,491	)		(3,494	)		(7,637	)		(13,350	)
Gain on sale of investment in business		(1,783	)		—			—			(1,783	)		—
Deferred taxes		1,789			(15	)		1,350			6,328			(5,905	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(9,390	)		7,625			11,038			(11,001	)		(4,181	)
Content library		(22,785	)		(9,998	)		(11,123	)		(64,217	)		(48,290	)
Accounts payable		8,894			(13,173	)		(7,917	)		(2,256	)		7,111
Accrued expenses		7,506			2,752			171			13,169			(1,824	)
Deferred revenue		20,974			(1,372	)		17,232			16,970			11,462
Other assets and liabilities		1,177			(2,240	)		2,148			1,685			9,137

Net cash provided by operating activities		105,817			78,311			92,100			325,063			284,037

Cash flows from investing activities:
Purchases of short-term investments		(125,841	)		(21,006	)		(76,118	)		(228,000	)		(256,959	)
Proceeds from sale of short-term investments		36,037			85,904			58,723			166,706			304,163
Proceeds from maturities of short-term investments		4,688			3,480			1,000			35,673			3,170
Purchases of property and equipment		(22,433	)		(9,994	)		(7,471	)		(45,932	)		(43,790	)
Acquisitions of intangible asset		—			—			—			(200	)		(1,062	)
Acquisitions of content library		(57,048	)		(46,273	)		(38,295	)		(193,044	)		(162,849	)
Proceeds from sale of DVDs		3,934			3,345			4,695			11,164			18,368
Proceeds from sale of investment in business		7,483			—			—			7,483			—
Investment in business		—			—			—			—			(6,000	)
Other assets		(72	)		134			(32	)		71			(1	)

Net cash provided by (used in) investing activities		(153,252	)		15,590			(57,498	)		(246,079	)		(144,960	)

Cash flows from financing activities:
Principal payments of lease financing obligations		(300	)		(294	)		(237	)		(1,158	)		(823	)
Proceeds from issuance of common stock		9,182			2,725			3,231			35,274			18,872
Excess tax benefits from stock-based compensation		3,584			1,600			753			12,683			5,220
Borrowings on line of credit, net of issuance costs		18,978			—			—			18,978			—
Payments on line of credit		(20,000	)		—			—			(20,000	)		—
Proceeds from issuance of debt, net of issuance costs		193,917			—			—			193,917			—
Repurchases of common stock		(79,419	)		(129,686	)		(9,992	)		(324,335	)		(199,904	)

Net cash provided by (used in) financing activities		125,942			(125,655	)		(6,245	)		(84,641	)		(176,635	)

Net increase (decrease) in cash and cash equivalents		78,507			(31,754	)		28,357			(5,657	)		(37,558	)
Cash and cash equivalents, beginning of period		55,717			87,471			111,524			139,881			177,439

Cash and cash equivalents, end of period	$	134,224		$	55,717		$	139,881		$	134,224		$	139,881


Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities	$	105,817		$	78,311		$	92,100		$	325,063		$	284,037
Purchases of property and equipment		(22,433	)		(9,994	)		(7,471	)		(45,932	)		(43,790	)
Acquisitions of intangible asset		—			—			—			(200	)		(1,062	)
Acquisitions of content library		(57,048	)		(46,273	)		(38,295	)		(193,044	)		(162,849	)
Proceeds from sale of DVDs		3,934			3,345			4,695			11,164			18,368
Other assets		(72	)		134			(32	)		71			(1	)

Non-GAAP free cash flow	$	30,198		$	25,523		$	50,997		$	97,122		$	94,703

Netflix, Inc.

Consolidated Other Data

(unaudited)

(in thousands, except percentages, average monthly revenue per paying subscriber, average monthly gross profit per paying subscriber and subscriber acquisition cost)


	As of / Three Months Ended
	December 31, 2009			September 30, 2009			December 31, 2008
Subscriber information:
Subscribers: beginning of period		11,109			10,599			8,672
Gross subscriber additions: during period		2,803			2,180			2,085
Gross subscriber additions year-to-year change		34.4	%		42.7	%		39.5	%
Gross subscriber additions quarter-to-quarter sequential change		28.6	%		12.6	%		36.5	%
Less subscriber cancellations: during period		(1,644	)		(1,670	)		(1,367	)
Subscribers: end of period		12,268			11,109			9,390
Subscribers year-to-year change		30.6	%		28.1	%		25.6	%
Subscribers quarter-to-quarter sequential change		10.4	%		4.8	%		8.3	%
Free subscribers: end of period		376			274			226
Free subscribers as percentage of ending subscribers		3.1	%		2.5	%		2.4	%
Paid subscribers: end of period		11,892			10,835			9,164
Paid subscribers year-to-year change		29.8	%		27.6	%		25.1	%
Paid subscribers quarter-to-quarter sequential change		9.8	%		4.4	%		7.9	%
Average monthly revenue per paying subscriber	$	13.04		$	13.30		$	13.58
Average monthly gross profit per paying subscriber	$	4.96		$	4.65		$	4.79
Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie		48	%		41	%		28	%
Churn		3.9	%		4.4	%		4.2	%
Subscriber acquisition cost	$	25.23		$	26.86		$	26.67
Margins:
Gross margin		38.0	%		34.9	%		35.2	%
Operating margin		12.0	%		11.6	%		10.5	%
Net margin		7.0	%		7.1	%		6.3	%
Expenses as percentage of revenues:
Technology and development		7.5	%		7.1	%		6.7	%
Marketing		15.9	%		13.8	%		15.5	%
General and administrative		3.0	%		2.7	%		3.0	%
Gain on disposal of DVDs		(0.4	)%		(0.3	)%		(0.5	)%

Total operating expenses		26.0	%		23.3	%		24.7	%
Year-to-year change:
Total revenues		23.6	%		24.0	%		18.9	%
Subscription		19.6	%		24.9	%		14.8	%
Fulfillment expenses		11.9	%		11.2	%		25.0	%
Technology and development		38.1	%		28.4	%		30.3	%
Marketing		27.1	%		19.0	%		7.6	%
General and administrative		25.7	%		(1.7	)%		(20.7	)%
Gain on disposal of DVDs		8.6	%		(1.5	)%		(5.5	)%
Total operating expenses		30.3	%		19.1	%		8.3	%

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