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

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EX-99.2 - MANAGEMENT'S COMMENTARY ON FINANCIAL RESULTS FOR THE QUARTER ENDED JUNE 30, 2010 - NETFLIX INC	dex992.htm
8-K - FORM 8-K - NETFLIX INC	d8k.htm

Exhibit 99.1

LOGO


FOR IMMEDIATE RELEASE	IR CONTACT:	Deborah Crawford
Wednesday, July 21, 2010		VP, Investor Relations
		(408) 540-3712

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

Netflix Announces Q2 2010 Financial Results

Subscribers – 15.0 million

Revenue – $519.8 million

GAAP Net Income – $43.5 million

GAAP EPS – $0.80 per diluted share

LOS GATOS, Calif., July 21, 2010 – Netflix, Inc. (Nasdaq: NFLX) today reported results for the second quarter ended June 30, 2010.

“Our rate of subscriber growth continues to accelerate and we added more than a million net new subscribers for the third consecutive quarter,” said Netflix Co-Founder and CEO Reed Hastings. “Consumers are clearly enthralled by our offering of unlimited movies and TV shows streamed over the Internet.”

Second-Quarter 2010 Financial Highlights

Subscribers. Netflix ended the second quarter of 2010 with approximately 15,001,000 total subscribers, representing 42 percent year-over-year growth from 10,599,000 total subscribers at the end of the second quarter of 2009 and 7 percent sequential growth from 13,967,000 subscribers at the end of the first quarter of 2010.

Net subscriber change in the quarter was an increase of 1,034,000 compared to an increase of 289,000 for the same period of 2009 and an increase of 1,699,000 for the first quarter of 2010.

Gross subscriber additions for the quarter totaled 3,059,000, representing 58 percent year-over-year growth from 1,936,000 gross subscriber additions in the second quarter of 2009 and 12 percent quarter-over-quarter decline from 3,492,000 gross subscriber additions in the first quarter of 2010.

Of the 15,001,000 total subscribers at quarter end, 97 percent, or 14,577,000, were paid subscribers. The other 3 percent, or 424,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2009 and at the end of the first quarter of 2010.

Revenue for the second quarter of 2010 was $519.8 million, representing 27 percent year-over-year growth from $408.5 million for the second quarter of 2009, and 5 percent sequential growth from $493.7 million for the first quarter of 2010.

Gross margin¹ for the second quarter of 2010 was 39.4 percent compared to 34.1 percent for the second quarter of 2009 and 37.8 percent for the first quarter of 2010.

GAAP net income for the second quarter of 2010 was $43.5 million, or $0.80 per diluted share compared to GAAP net income of $32.4 million, or $0.54 per diluted share, for the second quarter of 2009 and GAAP net income of $32.3 million, or $0.59 per diluted share, for the first quarter of 2010. GAAP net income grew 34 percent on a year-over-year basis and GAAP EPS grew 48 percent on a year-over-year basis.

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the second quarter of 2010 was 61 percent compared to 37 percent for the same period of 2009 and 55 percent for the first quarter of 2010.

Subscriber acquisition cost² for the second quarter of 2010 was $24.37 per gross subscriber addition compared to $23.88 for the same period of 2009 and $21.54 for the first quarter of 2010.

Churn³ for the second quarter of 2010 was 4.0 percent compared to 4.5 percent for the second quarter of 2009 and 3.8 percent for the first quarter of 2010. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Free cash flow⁴ for the second quarter of 2010 was $34.2 million compared to $26.3 million for the second quarter of 2009 and $37.6 million for the first quarter of 2010.

Last twelve-month free cash flow for the second quarter of 2010 was $127.5 million compared to $118.6 million for the second quarter of 2009 and $119.6 million for the first quarter of 2010.

Cash provided by operating activities for the second quarter of 2010 was $60.3 million compared to $75.3 million for the second quarter of 2009 and $77.2 million for the first quarter of 2010.

Business Outlook

The Company’s performance expectations for the third and fourth quarters of 2010 and full-year 2010 are as follows:

Third-Quarter 2010

•

Ending subscribers of 16.3 million to 16.7 million

•

Revenue of $546 million to $554 million

•

GAAP net income of $33 million to $40 million

•

GAAP EPS of $0.61 to $0.74 per diluted share

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 Condensed Consolidated Statements of Operations divided by total gross subscriber additions during the quarter.

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.

Fourth-Quarter 2010

•

Ending subscribers of 17.7 million to 18.5 million

•

Revenue of $580 million to $596 million

•

GAAP net income of $32 million to $40 million

•

GAAP EPS of $0.58 to $0.73 per diluted share

Full-Year 2010

•

Ending subscribers of 17.7 million to 18.5 million, up from 16.5 million to 17.3 million

•

Revenue of $2.14 billion to $2.16 billion, up from $2.11 billion to $2.16 billion

•

GAAP net income of $141 million to $156 million, up from $132 million to $144 million

•

GAAP EPS of $2.58 to $2.86 per diluted share, up from $2.41 to $2.63 per diluted share

Earnings Q&A Session

In conjunction with this earnings press release, the Company has posted management’s commentary to its Web site at http://ir.netflix.com. Netflix management will host a live Q&A session at 3:00 p.m. Pacific Time to discuss the Company’s financial results and business outlook, with questions submitted via email. Please email your questions to ir@netflix.com. (Please note this new email address). 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) 540-3947 or sswasey@netflix.com.

A live webcast and the replay of the earnings Q&A session can be accessed on the investor relations section of the Netflix website at http://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from 6:00 p.m. Pacific Time on July 21, 2010 through midnight on July 24, 2010. To listen to the replay, call (706) 645-9291, conference ID 84659036.

Use of Non-GAAP Measures

This press release and its attachments include reference to non-GAAP financial measures of free cash flow and non-GAAP net income. 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 15 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 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; and Apple’s iPad tablet. 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 third and fourth quarters 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 22, 2010. 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									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2010			2010			2009			2010			2009
Revenues	$	519,819		$	493,665		$	408,509		$	1,013,484		$	802,607
Cost of revenues:
Subscription		265,387			259,560			227,316			524,947			444,772
Fulfillment expenses *		49,547			47,602			41,927			97,149			83,739

Total cost of revenues		314,934			307,162			269,243			622,096			528,511

Gross profit		204,885			186,503			139,266			391,388			274,096
Operating expenses:
Technology and development *		37,863			37,399			27,119			75,262			51,319
Marketing *		74,533			75,219			46,231			149,752			108,473
General and administrative *		17,119			17,193			13,252			34,312			26,266
Gain on disposal of DVDs		(1,972	)		(1,653	)		(118	)		(3,625	)		(1,215	)

Total operating expenses		127,543			128,158			86,484			255,701			184,843

Operating income		77,342			58,345			52,782			135,687			89,253
Other income (expense):
Interest expense		(4,893	)		(4,959	)		(674	)		(9,852	)		(1,344	)
Interest and other income		921			972			866			1,893			2,476

Income before income taxes		73,370			54,358			52,974			127,728			90,385
Provision for income taxes		29,851			22,086			20,531			51,937			35,579

Net income	$	43,519		$	32,272		$	32,443		$	75,791		$	54,806

Net income per share:
Basic	$	0.83		$	0.61		$	0.56		$	1.44		$	0.94
Diluted	$	0.80		$	0.59		$	0.54		$	1.39		$	0.91
Weighted average common shares outstanding:
Basic		52,486			52,911			57,872			52,697			58,301
Diluted		54,324			54,775			59,660			54,548			60,182
* Stock-based compensation included in expense line items:
Fulfillment expenses	$	307		$	176		$	102		$	483		$	222
Technology and development		2,376			1,869			1,190			4,245			2,261
Marketing		756			643			458			1,399			901
General and administrative		3,489			2,814			1,528			6,303			3,026

Reconciliation of Non-GAAP Financial Measures
(unaudited)
Non-GAAP net income reconciliation:
GAAP net income	$	43,519		$	32,272		$	32,443		$	75,791		$	54,806
Stock-based compensation		6,928			5,502			3,278			12,430			6,410
Income tax effect of stock-based compensation		(2,820	)		(2,234	)		(1,272	)		(5,054	)		(2,531	)

Non-GAAP net income	$	47,627		$	35,540		$	34,449		$	83,167		$	58,685

Non-GAAP net income per share:
Basic	$	0.91		$	0.67		$	0.60		$	1.58		$	1.01
Diluted	$	0.88		$	0.65		$	0.58		$	1.52		$	0.98
Weighted average common shares outstanding:
Basic		52,486			52,911			57,872			52,697			58,301
Diluted		54,324			54,775			59,660			54,548			60,182

Netflix, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)


	As of
	June 30,		December 31,
	2010		2009
Assets
Current assets:
Cash and cash equivalents	$	107,327	$	134,224
Short-term investments		171,758		186,018
Current content library, net		93,123		37,329
Prepaid content		33,837		26,741
Other current assets		35,173		26,701

Total current assets		441,218		411,013
Content library, net		94,666		108,810
Property and equipment, net		123,292		131,653
Deferred tax assets		21,951		15,958
Other non-current assets		12,845		12,300

Total assets	$	693,972	$	679,734

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	120,031	$	91,475
Accrued expenses		34,746		33,387
Current portion of lease financing obligations		1,971		1,410
Deferred revenue		101,419		100,097

Total current liabilities		258,167		226,369
Long-term debt		200,000		200,000
Lease financing obligations, excluding current portion		35,185		36,572
Other non-current liabilities		23,980		17,650

Total liabilities		517,332		480,591
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at June 30, 2010 and December 31, 2009; 52,358,171 and 53,440,073 issued and outstanding at June 30, 2010 and December 31, 2009, respectively		52		53
Accumulated other comprehensive income, net		802		273
Retained earnings		175,786		198,817

Total stockholders’ equity		176,640		199,143

Total liabilities and stockholders’ equity	$	693,972	$	679,734

Netflix, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2010			2010*			2009			2010			2009
Cash flows from operating activities:
Net income	$	43,519		$	32,272		$	32,443		$	75,791		$	54,806
Adjustments to reconcile net income to net cash provided by operating activities:
Acquisition of streaming content library		(66,157	)		(50,475	)		(9,343	)		(116,632	)		(31,434	)
Amortization of content library		65,143			62,292			53,235			127,435			102,539
Depreciation and amortization of property, equipment and intangibles		9,309			10,859			9,013			20,168			18,188
Amortization of discounts and premiums on investments		236			234			119			470			313
Amortization of debt issuance costs		137			98			—			235			—
Stock-based compensation expense		6,928			5,502			3,278			12,430			6,410
Excess tax benefits from stock-based compensation		(11,182	)		(7,424	)		(3,815	)		(18,606	)		(7,499	)
Loss on disposal of property and equipment		—			—			110			—			254
(Gain) loss on sale of short-term investments		(215	)		(264	)		101			(479	)		(471	)
Gain on disposal of DVDs		(3,058	)		(3,228	)		(506	)		(6,286	)		(2,539	)
Deferred taxes		(3,394	)		(2,761	)		5,898			(6,155	)		4,554
Changes in operating assets and liabilities:
Prepaid content		(2,133	)		(4,963	)		(1,613	)		(7,096	)		2,485
Other current assets		(9,211	)		548			(7,232	)		(8,663	)		(11,721	)
Accounts payable		19,263			16,878			(6,549	)		36,141			2,023
Accrued expenses		7,917			13,746			(34	)		21,663			2,911
Deferred revenue		1,310			12			(128	)		1,322			(2,632	)
Other assets and liabilities		1,840			3,879			325			5,719			2,748

Net cash provided by operating activities		60,252			77,205			75,302			137,457			140,935

Cash flows from investing activities:
Acquisitions of DVD content library		(24,191	)		(36,902	)		(43,224	)		(61,093	)		(89,723	)
Purchases of short-term investments		(21,795	)		(35,995	)		(28,769	)		(57,790	)		(81,153	)
Proceeds from sale of short-term investments		32,055			30,770			7,832			62,825			44,765
Proceeds from maturities of short-term investments		4,310			4,013			26,175			8,323			27,505
Purchases of property and equipment		(5,671	)		(6,393	)		(6,933	)		(12,064	)		(13,505	)
Acquisitions of intangible assets		—			(130	)		—			(130	)		(200	)
Proceeds from sale of DVDs		3,815			3,984			1,159			7,799			3,885
Other assets		10			(172	)		11			(162	)		9

Net cash used in investing activities		(11,467	)		(40,825	)		(43,749	)		(52,292	)		(108,417	)

Cash flows from financing activities:
Principal payments of lease financing obligations		(465	)		(361	)		(295	)		(826	)		(564	)
Proceeds from issuance of common stock		13,109			9,918			9,778			23,027			23,367
Excess tax benefits from stock-based compensation		11,182			7,424			3,815			18,606			7,499
Repurchases of common stock		(45,145	)		(107,724	)		(72,511	)		(152,869	)		(115,230	)

Net cash used in financing activities		(21,319	)		(90,743	)		(59,213	)		(112,062	)		(84,928	)

Net increase (decrease) in cash and cash equivalents		27,466			(54,363	)		(27,660	)		(26,897	)		(52,410	)
Cash and cash equivalents, beginning of period		79,861			134,224			115,131			134,224			139,881

Cash and cash equivalents, end of period	$	107,327		$	79,861		$	87,471		$	107,327		$	87,471


	Three Months Ended									Six Months Ended
	June 30, 2010			March 31, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities	$	60,252		$	77,205		$	75,302		$	137,457		$	140,935
Acquisitions of DVD content library		(24,191	)		(36,902	)		(43,224	)		(61,093	)		(89,723	)
Purchases of property and equipment		(5,671	)		(6,393	)		(6,933	)		(12,064	)		(13,505	)
Acquisitions of intangible assets		—			(130	)		—			(130	)		(200	)
Proceeds from sale of DVDs		3,815			3,984			1,159			7,799			3,885
Other assets		10			(172	)		11			(162	)		9

Non-GAAP free cash flow	$	34,215		$	37,592		$	26,315		$	71,807		$	41,401

*	Certain prior period amounts have been reclassified.


	Twelve Months Ended
	June 30,			March 31,			June 30,
	2010			2010			2009
Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities	$	321,585		$	336,635		$	293,530
Acquisitions of DVD content library		(164,414	)		(183,447	)		(156,846	)
Purchases of property and equipment		(44,491	)		(45,753	)		(30,202	)
Acquisitions of intangible assets		(130	)		(130	)		(262	)
Proceeds from sale of DVDs		15,078			12,422			12,367
Other assets		(100	)		(99	)		(20	)

Non-GAAP free cash flow	$	127,528		$	119,628		$	118,567

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
	June 30,			March 31,			June 30,
	2010			2010			2009
Subscriber information:
Subscribers: beginning of period		13,967			12,268			10,310
Gross subscriber additions: during period		3,059			3,492			1,936
Gross subscriber additions year-to-year change		58.0	%		44.7	%		39.9	%
Gross subscriber additions quarter-to-quarter sequential change		(12.4	%)		24.6	%		(19.8	%)
Less subscriber cancellations: during period		(2,025	)		(1,793	)		(1,647	)
Subscribers: end of period		15,001			13,967			10,599
Subscribers year-to-year change		41.5	%		35.5	%		26.0	%
Subscribers quarter-to-quarter sequential change		7.4	%		13.8	%		2.8	%
Free subscribers: end of period		424			345			224
Free subscribers as percentage of ending subscribers		2.8	%		2.5	%		2.1	%
Paid subscribers: end of period		14,577			13,622			10,375
Paid subscribers year-to-year change		40.5	%		34.7	%		26.0	%
Paid subscribers quarter-to-quarter sequential change		7.0	%		14.5	%		2.6	%
Average monthly revenue per paying subscriber	$	12.29		$	12.90		$	13.29
Average monthly gross profit per paying subscriber	$	4.84		$	4.87		$	4.53
Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie		61	%		55	%		37	%
Household penetration - Bay Area		26	%		24	%		21	%
Household penetration - Rest of Country		13	%		12	%		9	%
Churn		4.0	%		3.8	%		4.5	%
Subscriber acquisition cost	$	24.37		$	21.54		$	23.88
Margins:
Gross margin		39.4	%		37.8	%		34.1	%
Operating margin		14.9	%		11.8	%		13.0	%
Net margin		8.4	%		6.5	%		8.0	%
Expenses as percentage of revenues:
Technology and development		7.3	%		7.6	%		6.6	%
Marketing		14.3	%		15.2	%		11.3	%
General and administrative		3.3	%		3.5	%		3.2	%
Gain on disposal of DVDs		(0.4	%)		(0.3	%)		—

Total operating expenses		24.5	%		26.0	%		21.1	%
Year-to-year change:
Total revenues		27.2	%		25.3	%		21.0	%
Cost of subscription		16.7	%		19.4	%		17.3	%
Fulfillment expenses		18.2	%		13.8	%		15.4	%
Technology and development		39.6	%		54.5	%		22.2	%
Marketing		61.2	%		20.8	%		15.6	%
General and administrative		29.2	%		32.1	%		(1.2	%)
Gain on disposal of DVDs		1571.2	%		50.7	%		(94.8	%)
Total operating expenses		47.5	%		30.3	%		17.9	%

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