Netflix Announces Q4 Results

Netflix Announces Q4 Results 2.6 Million Subscribers, Churn of 4.4%, Revenue of $144 Million, GAAP Net Income of $4.8 Million LOS GATOS, Calif., Jan. 24 /PRNewswire-FirstCall/ -- Netflix (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2004. For the fourth quarter: * Revenue increased 77 percent year over year to $143.9 million * GAAP net income was $4.8 million representing a 112 percent year over year increase. Net income in the U.S. was $7.8 million. The U.K. net loss was $3.0 million. * Free cash flow was $5.4 million and GAAP net cash provided by operating activities was $32.5 million "2004 was a spectacular year for Netflix. We delivered strong revenue and earnings. We grew to more than 2.6 million subscribers, and we achieved our lowest churn ever in the fourth quarter, despite intense competition," said Reed Hastings, co-founder and CEO of Netflix. "We do online DVD rental better than anyone on the planet, and we continue to enhance our service everyday with innovative features like Friends and Profiles." "In 2005, you can expect us to maintain rapid subscriber growth and our category leadership position," Hastings said. Fourth Quarter and Fiscal Year 2004 Financial Highlights Revenue for the fourth quarter was a record $143.9 million, representing 77 percent year over year growth from $81.2 million, and 2 percent quarter over quarter growth from $141.6 million. Revenue growth slowed sequentially as a result of the November 1, 2004 price reduction. Revenue for fiscal 2004 was $506.2 million, up 86 percent from $272.2 million for fiscal 2003. GAAP net income for the fourth quarter was $4.8 million, or $0.08 per diluted share, compared to GAAP net income of $2.3 million, or $0.04 per diluted share, for the fourth quarter of 2003 and GAAP net income of $18.9 million, or $0.29 per diluted share, for the third quarter of 2004. GAAP net income included net income of $7.8 million in the U.S. and a net loss of $3.0 million for the U.K. GAAP net income for fiscal 2004 was $20.8 million, or $0.32 per diluted share, compared to GAAP net income of $6.5 million, or $0.10 per diluted share, for fiscal 2003. GAAP net income included net income of $25.4 million in the U.S. and a net loss of $4.6 million for the U.K. Non-GAAP net income was $9.2 million, or $0.14 per diluted share, for the fourth quarter of 2004 compared to non-GAAP net income of $6.1 million, or $0.09 per diluted share for the fourth quarter of 2003 and non-GAAP net income of $22.6 million, or $0.35 per diluted share, for the third quarter of 2004. Non-GAAP net income included non-GAAP net income of $12.2 million in the U.S. and a non-GAAP net loss of $3.0 million for the U.K. Non-GAAP net income was $37.4 million, or $0.58 per diluted share, for fiscal 2004 compared to non-GAAP net income of $17.2 million, or $0.27 per diluted share for fiscal 2003. Non-GAAP net income included non-GAAP net income of $42.0 million in the U.S. and a non-GAAP net loss of $4.6 million for the U.K. Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense. Free cash flow(1) for the fourth quarter 2004 was $5.4 million, compared to $9.2 million in the fourth quarter of 2003 and was $14.1 million for the third quarter of 2004. Free cash flow for fiscal 2004 was $34.8 million or 6.9 percent of revenue, up 30 percent from $26.8 million in fiscal 2003. Cash provided by operating activities for the fourth quarter of 2004 was $32.5 million, compared to $31.4 million for the fourth quarter of 2003 and $49.3 million for the third quarter of 2004. Cash provided by operating activities for fiscal 2004 was $147.6 million, compared to $89.8 million for fiscal 2003. Subscribers. Netflix ended the fourth quarter 2004 with approximately 2,610,000 total subscribers, representing 76 percent year over year growth from 1,487,000 total subscribers at the end of the fourth quarter of 2003. During the quarter Netflix acquired 783,000 gross subscriber additions, representing 76 percent year over year growth from 444,000 gross subscriber additions acquired in the fourth quarter of 2003 and 33 percent quarter over quarter growth from 590,000 gross subscriber additions acquired in the third quarter of 2004. Of the 2,610,000 total subscribers at quarter end, 95 percent or 2,486,000 were paid subscribers. The other 5 percent, or 124,000, were free subscribers. Paid subscribers represented 95 percent of total subscribers at the end of the fourth quarter of 2003 and 96 percent of total subscribers at the end of the third quarter of 2004. Household penetration in the San Francisco Bay Area rose to 9.0 percent of households at the end of the fourth quarter of 2004, up from 5.9 percent at the end of the fourth quarter of 2003 and up from 8.1 percent at the end of the third quarter of 2004. Household penetration in the rest of the country reached 2.3 percent at the end of the fourth quarter of 2004, up from 1.3 percent at the end of the fourth quarter of 2003 and up from 1.9 percent at the end of the third quarter of 2004. SAC for U.S. operations for the fourth quarter was $35.61 per gross subscriber addition compared to $32.89 for the same period of 2003 and $36.97 for the third quarter of 2004. SAC for U.S. operations for fiscal 2004 was $35.66 per gross subscriber addition compared to $31.79 for fiscal 2003. Churn(2) for the fourth quarter of 2004 reached a record low of 4.4 percent, compared to 4.8 percent for the fourth quarter of 2003 and 5.6 percent for the third quarter of 2004. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter. Gross margin for the fourth quarter was 45.5 percent compared to 45.2 percent for the fourth quarter of 2003 and 49.5 percent for the third quarter of 2004. Business Outlook The Company's performance expectations for the first quarter of 2005 and the full year of 2005 are as follows: First Quarter 2005 * Ending subscribers of 2.85 million to 3.05 million * Revenue of $149 million to $154 million * GAAP net loss of $16 million to $19 million Full Year 2005 * Ending subscribers of 3.85 million to 4.15 million * Revenue of $700 million to $730 million * GAAP net loss of $5 million to $15 million Float and Trading Plans The Company estimates the public float at approximately 45,543,522 shares as of December 31, 2004, up 1 percent from 45,059,814 shares as of September 30, 2004, based on registered shares held in street name with the Depository Trust and Clearing Corporation. No outstanding shares are subject to a lock- up agreement of any kind. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All open market sales are made pursuant to the terms of 10b5-1 Trading Plans approved by the Company and generally adopted no less than three months prior to the first date of sale under such plan. Earnings Call The Netflix earnings call will be webcast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed at http://ir.netflix.com/ . Following the conclusion of the webcast, a replay of the call will be available via Netflix's website at http://ir.netflix.com/ . For those without access to the Internet, a replay of the call will be available from approximately 5:00 p.m. Pacific Time on January 24, 2005 through January 31, 2005. To listen to a replay, call 719-457-0820, access code 622676. The Company also plans to include discussion of its business outlook in the conference call. 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 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 Netflix is the world's largest online movie rental service, providing more than two million subscribers access to over 30,000 DVD titles. For $17.99 a month, Netflix subscribers rent as many DVDs as they want, and keep them as long as they want, with three movies out at a time. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by first-class mail from regional shipping centers located throughout the United States. Netflix can reach more than 85 percent of its subscribers with generally one business-day delivery. The company provides subscribers extensive information about DVD movies, including critic reviews, member reviews, online trailers, ratings, and personalized movie recommendations. For more information, visit 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 and GAAP net income for the first quarter and full year of 2005. 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: impacts arising out of competition, our ability to manage our growth, in particular managing our subscriber acquisition cost as well as the mix between revenue sharing titles and titles not subject to revenue sharing that are delivered to our subscribers; our ability to attract new subscribers and retain existing subscribers; changes in pricing and availability for advertising space; fluctuations in consumer usage of our service, customer spending on DVD players, DVDs and related products; disruption in service on our website or with our computer systems; deterioration of the U.S. economy or conditions specific to online commerce or the filmed entertainment industry; conditions that effect our delivery through the U.S. Postal Service, including increases in first class postage; increases in the costs of acquiring DVDs; 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 SEC on February 27, 2004. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release. (1) Free cash flow is defined as cash provided by operating activities less cash provided by (used in) investing activities after excluding purchases and sales of short-term investments. (2) Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months. Netflix, Inc. Consolidated Statements of Operations (unaudited) (in thousands, except per share data) Three Months Ended Year Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2003 2004 2004 2003 2004 Revenues: Subscription $80,780 $140,414 $140,664 $270,410 $500,611 Sales 405 1,230 3,229 1,833 5,617 Total revenues 81,185 141,644 143,893 272,243 506,228 Cost of revenues: Subscription 44,334 71,130 76,223 147,736 273,401 Sales 130 471 2,219 624 3,057 Total cost of revenues 44,464 71,601 78,442 148,360 276,458 Gross profit 36,721 70,043 65,451 123,883 229,770 Operating expenses: Fulfillment 9,348 15,013 16,433 31,274 56,609 Technology and development 4,840 6,325 5,890 17,884 22,906 Marketing 14,602 22,525 29,089 49,949 98,784 General and administrative 2,566 4,122 5,749 9,585 16,287 Stock-based compensation 3,832 3,660 4,358 10,719 16,587 Total operating expenses 35,188 51,645 61,519 119,411 211,173 Operating income 1,533 18,398 3,932 4,472 18,597 Other income (expense): Interest and other income 782 579 1,118 2,457 2,592 Interest and other expense (44) (52) (57) (417) (170) Net income before income taxes 2,271 18,925 4,993 6,512 21,019 Provision for income taxes -- -- 181 -- 181 Net income $2,271 $18,925 $4,812 $6,512 $20,838 Net income per share: Basic $.05 $.36 $.09 $.14 $.40 Diluted $.04 $.29 $.08 $.10 $.32 Weighted average common shares outstanding: Basic 50,154 52,211 52,553 47,786 51,988 Diluted 64,282 64,449 63,702 62,884 64,713 Reconciliation of Non-GAAP Financial Measures (Unaudited) Non-GAAP net income reconciliation: Net income $2,271 $18,925 $4,812 $6,512 $20,838 Add back: -- -- Stock-based compensation 3,832 3,660 4,358 10,719 16,587 Non-GAAP net income $6,103 $22,585 $9,170 $17,231 $37,425 Non-GAAP net income per share: Basic $.12 $.43 $.17 $.36 $.72 Diluted $.09 $.35 $.14 $.27 $.58 Netflix, Inc. Consolidated Balance Sheets (unaudited) (in thousands, except share and par value data) As of December 31, December 31, 2003 2004 Assets Current assets: Cash and cash equivalents $89,894 $174,461 Short-term investments 45,297 -- Prepaid expenses 2,231 2,741 Prepaid revenue sharing expenses 905 4,695 Other current assets 619 4,692 Total current assets 138,946 186,589 DVD library, net 22,238 42,158 Intangible assets, net 2,948 961 Property and equipment, net 9,772 18,728 Deposits 1,272 1,600 Other assets 836 1,000 Total assets $176,012 $251,036 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $32,654 $49,775 Accrued expenses 11,625 13,131 Deferred revenue 18,324 31,936 Current portion of capital lease obligations 416 68 Total current liabilities 63,019 94,910 Deferred rent 241 600 Capital lease obligations, less current portion 44 -- Total liabilities 63,304 95,510 Stockholders' equity: Common stock, $0.001 par value; 80,000,000 and 160,000,000 shares authorized at December 31, 2003 and December 31, 2004, respectively; 50,849,370 and 52,732,025 issued and outstanding at December 31, 2003 and December 31, 2004, respectively 51 53 Additional paid-in capital 270,836 292,843 Deferred stock-based compensation (5,482) (4,693) Accumulated other comprehensive income (loss) 596 (222) Accumulated deficit (153,293) (132,455) Total stockholders' equity 112,708 155,526 Total liabilities and stockholders' equity $176,012 $251,036 Netflix, Inc. Consolidated Statements of Cash Flows (unaudited) (in thousands) Three Months Ended Year Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2003 2004 2004 2003 2004 Cash flows from operating activities: Net income $2,271 $18,925 $4,812 $6,512 $20,838 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,129 1,569 1,727 4,720 5,871 Amortization of DVD library 14,790 20,450 20,628 43,125 80,346 Amortization of intangible assets 756 453 454 3,146 1,987 Stock-based compensation expense 3,832 3,660 4,358 10,719 16,587 Stock option income tax benefits -- -- 176 -- 176 Loss on disposal of property and equipment -- -- 135 -- 135 Loss on disposal of short-term investments -- -- -- -- 274 Gain on disposal of DVDs (275) (941) (1,180) (1,604) (2,912) Noncash interest expense 19 11 11 103 44 Changes in operating assets and liabilities: Prepaid expenses and other current assets (560) (3,478) (3,373) (290) (8,373) Accounts payable 4,195 5,116 2,107 12,304 17,121 Accrued expenses 671 1,988 (2,709) 2,523 1,506 Deferred revenue 4,553 1,407 5,278 8,581 13,612 Deferred rent (22) 108 113 (47) 359 Net cash provided by operating activities 31,359 49,268 32,537 89,792 147,571 Cash flows from investing activities: Purchases of short-term investments (582) -- -- (1,679) (586) Proceeds from sale of short-term investments -- -- -- -- 45,013 Purchases of property and equipment (4,315) (4,165) (6,941) (8,872) (14,962) Acquisitions of DVD library (18,717) (31,986) (23,332) (55,620) (102,971) Proceeds from sale of DVDs 405 1,230 3,229 1,833 5,617 Deposits and other assets 423 (206) (99) (339) (492) Net cash used in investing activities (22,786) (35,127) (27,143) (64,677) (68,381) Cash flows from financing activities: Proceeds from issuance of common stock 2,266 373 1,538 6,299 6,035 Principal payments on notes payable and capital lease obligations (115) (100) (107) (1,334) (436) Net cash provided by financing activities 2,151 273 1,431 4,965 5,599 Effect of exchange rate changes on cash and cash equivalents -- (44) (178) -- (222) Net increase in cash and cash equivalents 10,724 14,370 6,647 30,080 84,567 Cash and cash equivalents, beginning of period 79,170 153,444 167,814 59,814 89,894 Cash and cash equivalents, end of period $89,894 $167,814 $174,461 $89,894 $174,461 Non-GAAP free cash flow reconciliation: Net cash provided by operating activities $31,359 $49,268 $32,537 $89,792 $147,571 Purchases of property and equipment (4,315) (4,165) (6,941) (8,872) (14,962) Acquisitions of DVD library (18,717) (31,986) (23,332) (55,620) (102,971) Proceeds from sale of DVDs 405 1,230 3,229 1,833 5,617 Deposits and other assets 423 (206) (99) (339) (492) Non-GAAP free cash flow $9,155 $14,141 $5,394 $26,794 $34,763 Netflix, Inc. Consolidated Other Data (unaudited) (in thousands, except percentages and subscriber acquisition cost) As of / Three Months Ended As of / Year Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2003 2004 2004 2003 2004 Subscriber information: Subscribers: beginning of period 1,291 2,093 2,229 857 1,487 Gross subscriber additions: during period 444 590 783 1,571 2,716 Gross subscriber additions year-to-year change 41.0% 54.0% 76.4% 37.8% 72.9% Gross subscriber additions quarter-to-quarter sequential change 15.9% 1.2% 32.7% Less subscriber cancellations: during period (248) (454) (402) (941) (1,593) Subscribers: end of period 1,487 2,229 2,610 1,487 2,610 Subscribers year-to-year change 73.5% 72.7% 75.5% 73.5% 75.5% Subscribers quarter-to-quarter sequential change 15.2% 6.5% 17.1% Free subscribers: end of period 71 94 124 71 124 Free subscribers as percentage of ending subscribers 4.8% 4.2% 4.8% 4.8% 4.8% Paid subscribers: end of period 1,416 2,135 2,486 1,416 2,486 Paid subscribers year-to-year change 77.9% 71.9% 75.6% 77.9% 75.6% Paid subscribers quarter-to-quarter sequential change 14.0% 5.5% 16.4% Churn 4.8% 5.6% 4.4% Subscriber acquisition cost - Consolidated $32.89 $38.18 $37.15 $31.79 $36.37 Subscriber acquisition cost - U.S. $32.89 $36.97 $35.61 $31.79 $35.66 Margins: Gross margin 45.2% 49.5% 45.5% 45.5% 45.4% Operating margin 1.9% 13.0% 2.7% 1.6% 3.7% Net margin 2.8% 13.4% 3.3% 2.4% 4.1% Expenses as percentage of revenues: Fulfillment 11.5% 10.6% 11.4% 11.5% 11.2% Technology and development 6.0% 4.5% 4.1% 6.6% 4.5% Marketing 18.0% 15.9% 20.2% 18.3% 19.5% General and administrative 3.2% 2.9% 4.0% 3.5% 3.2% Operating expenses before stock-based compensation 38.6% 33.9% 39.7% 39.9% 38.4% Stock-based compensation 4.7% 2.6% 3.0% 3.9% 3.3% Total operating expenses 43.3% 36.5% 42.7% 43.8% 41.7% Year-to-year change: Total revenues 79.7% 96.2% 77.2% 78.2% 85.9% Fulfillment 71.6% 80.4% 75.8% 61.5% 81.0% Technology and development 22.2% 33.5% 21.7% 22.3% 28.1% Marketing 39.2% 84.9% 99.2% 39.6% 97.8% General and administrative 33.6% 53.9% 124.0% 42.3% 69.9% Operating expenses before stock-based compensation 43.7% 71.9% 82.3% 42.1% 79.0% Stock-based compensation 41.0% 31.8% 13.7% 21.4% 54.7% Total operating expenses 43.4% 68.2% 74.8% 39.9% 76.8% Source: Netflix CONTACT: IR, Deborah Crawford, Director of Investor Relations, +1-408-317-3712, or PR, Shernaz Daver, +1-408-317-3723, both of Netflix Web site: http://www.netflix.com/ ------- Profile: International Entertainment