Netflix Announces Q4 2007 Financial Results

Netflix Announces Q4 2007 Financial Results

Subscribers - 7.5 million

Revenue - $302.4 million

GAAP Net Income - $15.8 million

GAAP EPS - $0.24 per diluted share

LOS GATOS, Calif., Jan. 23 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2007.

"We achieved strong results in 2007 -- ending subscribers up 18 percent, revenue up 21 percent and net income up 36 percent -- despite facing tough competition for much of the year and investing strategically in our online video initiatives," said Reed Hastings, Netflix co-founder and chief executive officer.

"The emergence of a bundled service that enables our subscribers to receive DVDs through the mail fast and movies and TV episodes over the Internet instantly, positions us to achieve solid growth in 2008 and over the long term."

Fourth-Quarter and Fiscal-Year 2007 Financial Highlights

Revenue for the fourth quarter of 2007 was $302.4 million, representing 9 percent year-over-year growth from $277.2 million for the fourth quarter of 2006, and 3 percent sequential increase from $294.0 million for the third quarter of 2007. Revenue for fiscal 2007 was $1.205 billion, up 21 percent from $996.7 million for fiscal 2006.

GAAP net income for the fourth quarter of 2007 was $15.8 million, or $0.24 per diluted share, compared to GAAP net income of $14.9 million, or $0.21 per diluted share, for the fourth quarter of 2006 and GAAP net income of $15.7 million, or $0.23 per diluted share, for the third quarter of 2007.

GAAP net income for fiscal 2007 was $67.0 million, or $0.97 per diluted share, compared to GAAP net income of $49.1 million, or $0.71 per diluted share, for fiscal 2006.

Non-GAAP net income was $17.8 million, or $0.27 per diluted share, for the fourth quarter of 2007, compared to non-GAAP net income of $16.8 million, or $0.24 per diluted share, for the fourth quarter of 2006 and non-GAAP net income of $17.6 million, or $0.26 per diluted share, for the third quarter of 2007.

Non-GAAP net income was $74.2 million, or $1.08 per diluted share, for fiscal 2007 compared to non-GAAP net income of $56.8 million, or $0.82 per diluted share for fiscal 2006.

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

Gross margin(1) for the fourth quarter of 2007 was 33.8 percent, compared to 38.9 percent for the fourth quarter of 2006 and 33.9 percent for the third quarter of 2007. Gross margin for fiscal 2007 was 34.8 percent, compared to 37.1 percent for fiscal 2006.

Free cash flow(2) for the fourth quarter of 2007 was $21.0 million, compared to $22.5 million in the fourth quarter of 2006 and $36.1 million for the third quarter of 2007. Free cash flow for fiscal 2007 was $45.5 million as compared to $62.0 million in fiscal 2006.

Cash provided by operating activities for the fourth quarter of 2007 was $84.4 million, compared to $87.1 million for the fourth quarter of 2006 and $77.6 million for the third quarter of 2007. Cash provided by operating activities for fiscal 2007 was $290.1 million, compared to $247.9 million for fiscal 2006.

Subscribers. Netflix ended the fourth quarter of 2007 with approximately 7,479,000 total subscribers, representing 18 percent year-over-year growth from 6,316,000 total subscribers at the end of the fourth quarter of 2006 and 6 percent sequential growth from 7,028,000 subscribers at the end of the third quarter of 2007.

Net subscriber change in the quarter was an increase of 451,000, compared to an increase of 654,000 for the same period of 2006 and an increase of 286,000 for the third quarter of 2007.

Gross subscriber additions for the quarter totaled 1,495,000, essentially flat year-over-year from 1,493,000 gross subscriber additions in the fourth quarter of 2006 and 15 percent quarter-over-quarter growth from 1,297,000 gross subscriber additions in the third quarter of 2007.

Of the 7,479,000 total subscribers at quarter end, 98 percent, or 7,326,000 were paid subscribers. The other 2 percent, or 153,000, were free subscribers. Paid subscribers represented 97 percent of total subscribers at the end of the fourth quarter of 2006 and at the end of the third quarter of 2007.

Subscriber acquisition cost(3) for the fourth quarter of 2007 was $34.60 per gross subscriber addition, compared to $44.31 for the same period of 2006 and $37.91 for the third quarter of 2007. SAC for fiscal 2007 was $40.88 per gross subscriber addition compared to $42.96 for fiscal 2006.

Churn(4) for the fourth quarter of 2007 was 4.1 percent, compared to 3.9 percent for the fourth quarter of 2006 and 4.2 percent for the third quarter of 2007. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Stock-based compensation for the fourth quarter of 2007 was $3.2 million, compared to $3.1 million in the fourth quarter of 2006 and the third quarter of 2007. Stock-based compensation for fiscal 2007 was $12.0 million, compared to $12.7 million for fiscal 2006. Stock-based compensation is presented in the same lines of the Consolidated Statements of Operations as cash compensation paid to the same individuals.

Business Outlook

The Company's performance expectations for the first quarter of 2008 and full-year 2008 are as follows:

   First-Quarter 2008   -- Ending subscribers of 7.85 million to 8.05 million   -- Revenue of $323 million to $328 million   -- GAAP net income of $9 million to $14 million   -- GAAP EPS of $0.13 to $0.21 per diluted share     Full-Year 2008   -- Ending subscribers of 8.4 million to 8.9 million   -- Revenue of $1.3 billion to $1.35 billion   -- GAAP net income of $75 million to $83 million   -- GAAP EPS of $1.12 to $1.24 per diluted share     Float and Trading Plans  

The Company estimates the public float at approximately 52,723,123 shares as of December 31, 2007, down approximately 1 percent from 53,352,707 shares as of September 30, 2007, based on registered shares held in street name with the Depository Trust and Clearing Corporation. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All open market sales by executive officers 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 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 5:00 p.m. Pacific Time on January 23, 2008 through January 26, 2008 at 9:00 p.m. Pacific Time. To listen to the telephone replay, call (719) 457-0820, access code 6179304.

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, Inc (NASDAQ:NFLX) is the world's largest online movie rental service, providing more than seven million subscribers access to more than 90,000 DVD titles plus a growing library of more than 6,000 choices that can be watched instantly on their PCs. The company offers nine subscription plans, starting at only $4.99 per month. There are no due dates and no late fees -- ever. All Netflix plans include both DVDs delivered to subscribers' homes and, for no additional fee, movies and TV series that can be started in as little as 30 seconds on subscribers' PCs. DVDs are delivered free to members by first class mail, with a postage-paid return envelope, from over 100 U.S. shipping points. Nearly 95 percent of Netflix subscribers live in areas that can be reached with generally one business day delivery. Netflix offers personalized movie recommendations and has two billion movie ratings. 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 2008 and the full-year 2008. 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; impacts arising out of competition; our ability to manage our subscriber acquisition cost as well as the cost of content delivered to our subscribers; changes in pricing; fluctuations in consumer usage of our service; conditions that effect our delivery through the U.S. Postal Service, including regulatory changes and increases in first class postage; increases in the costs of acquiring DVDs or electronic content; customer spending on 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; 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 28, 2007. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

   (1) Gross margin is defined as revenues less cost of subscription and       fulfillment expenses.   (2) Free cash flow is defined as cash provided by operating activities       less cash used in investing activities excluding purchases and sales       of short-term investments.   (3) 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.   (4) 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       Twelve Months Ended                          December  September  December  December   December                             31,       30,       31,        31,        31,                            2007      2007      2006       2007       2006    Revenues               $302,355  $293,972  $277,233  $1,205,340  $996,660   Cost of revenues:     Subscription          168,673   163,707   142,586     664,407   532,621     Fulfillment expenses*  31,377    30,746    26,762     121,761    94,364       Total cost of        revenues           200,050   194,453   169,348     786,168   626,985   Gross profit            102,305    99,519   107,885     419,172   369,675   Operating expenses:     Technology and      development*          18,557    18,216    13,201      71,395    48,379     Marketing*             51,721    49,166    66,158     218,280   225,524     General and      administrative*       13,602    12,895    11,142      52,532    36,155     Gain on disposal of      DVDs                  (1,696)   (2,310)   (1,304)     (7,196)   (4,797)     Gain on legal      settlement               -         -         -        (7,000)      -       Total operating        expenses            82,184    77,967    89,197     328,011   305,261   Operating income         20,121    21,552    18,688      91,161    64,414   Other income:     Interest and other      income                 4,929     5,089     5,064      20,340    15,904   Income before income    taxes                   25,050    26,641    23,752     111,501    80,318   Income taxes              9,274    10,909     8,892      44,549    31,236   Net income              $15,776   $15,732   $14,860     $66,952   $49,082   Net income per share:     Basic                   $0.24     $0.24     $0.22       $1.00     $0.78     Diluted                 $0.24     $0.23     $0.21       $0.97     $0.71   Weighted average common    shares outstanding:     Basic                  65,156    66,469    68,424      67,076    62,577     Diluted                67,042    68,090    70,670      68,902    69,075    *Stock-based     compensation included     in expense line items:      Fulfillment expenses    $100       $99      $229        $427      $925      Technology and       development           1,105     1,002       892       3,695     3,608      Marketing                561       547       515       2,160     2,138      General and       administrative        1,476     1,465     1,494       5,694     6,025    Reconciliation of Non-    GAAP Financial Measures   (Unaudited)   Non-GAAP net income    reconciliation:   GAAP net income         $15,776   $15,732   $14,860     $66,952   $49,082     Stock-based      compensation           3,242     3,113     3,130      11,976    12,696     Income tax effect of      stock-based      compensation          (1,200)   (1,273)   (1,171)     (4,757)   (4,950)   Non-GAAP net income     $17,818   $17,572   $16,819     $74,171   $56,828   Non-GAAP net income    per share:     Basic                   $0.27     $0.26     $0.25       $1.11     $0.91     Diluted                 $0.27     $0.26     $0.24       $1.08     $0.82   Weighted average    common shares    outstanding:     Basic                  65,156    66,469    68,424      67,076    62,577     Diluted                67,042    68,090    70,670      68,902    69,075      Netflix, Inc.   Consolidated Balance Sheets   (unaudited)   (in thousands, except share and par value data)                                                           As of                                              December 31,       December 31,                                                  2007               2006   Assets   Current assets:     Cash and cash equivalents                  $177,439           $400,430     Short-term investments                      207,703                -     Prepaid expenses                              6,116              4,742     Prepaid revenue sharing expenses              6,983              9,456     Deferred tax assets                           2,254              3,155     Other current assets                         16,037             10,635        Total current assets                     416,532            428,418   Content library, net                          132,455            104,908   Property and equipment, net                    77,326             55,503   Deferred tax assets                            16,242             15,600   Other assets                                    4,465              4,350        Total assets                            $647,020           $608,779   Liabilities and Stockholders'    Equity   Current liabilities:     Accounts payable                           $104,445            $93,864     Accrued expenses                             36,466             29,905     Deferred revenue                             71,665             69,678        Total current liabilities                212,576            193,447   Other liabilities                               3,695              1,121        Total liabilities                        216,271            194,568   Stockholders' equity:    Common stock, $0.001 par value;     160,000,000 shares authorized at     December 31, 2007 and December 31, 2006;     64,912,915 and 68,612,463 issued and     outstanding at December 31, 2007 and     December 31, 2006, respectively                  65                 69    Additional paid-in capital                   402,710            454,731    Accumulated other comprehensive income         1,611                -    Retained earnings (accumulated deficit)       26,363            (40,589)        Total stockholders' equity               430,749            414,211        Total liabilities and         stockholders' equity                   $647,020           $608,779      Netflix, Inc.   Consolidated Statements of Cash Flows   (unaudited)   (in thousands)                                 Three Months Ended      Twelve Months Ended                            December  September  December  December  December                               31,       30,       31,       31,       31,                              2007      2007      2006      2007      2006    Cash flows from     operating activities:    Net income               $15,776   $15,732   $14,860   $66,952   $49,082    Adjustments to     reconcile net income     to net cash provided     by operating activities:      Depreciation of       property and equipment  5,915     5,752     4,374    21,394    15,903      Amortization of       content library        54,751    48,237    45,716   203,415   141,160      Amortization of       intangible assets          79        25        25       153        73      Amortization of       discounts and       premiums on       investments                72        23       -          24       -      Stock-based       compensation expense    3,242     3,113     3,130    11,976    12,696      Excess tax benefits       from stock-based       compensation           (4,984)   (5,170)   (5,652)  (26,248)  (13,217)      Gain (loss) on       disposal of property       and equipment              14       128       -         142       (23)      Gain on sale of       short-term       investments              (323)     (170)      -        (687)      -      Gain on disposal of       DVDs                   (2,906)   (3,937)   (2,770)  (14,637)   (9,089)      Deferred taxes             399      (300)    2,651      (661)   16,150      Changes in operating       assets and liabilities:       Prepaid expenses and        other current assets     192       111    (3,134)   (4,303)   (7,064)       Accounts payable       (2,514)    6,048     3,178    (2,901)    3,208       Accrued expenses         (567)   11,433     4,918    32,809    17,559       Deferred revenue       15,344    (4,201)   19,803     1,987    21,145       Other liabilities         (82)      741        12       724       279         Net cash provided          by operating          activities          84,408    77,565    87,111   290,139   247,862    Cash flows from     investing activities:    Purchases of short-term     investments             (35,228)  (51,972)      -    (405,340)      -    Proceeds from sale of     short-term investments   35,453    41,264       -     200,832       -    Purchases of property     and equipment            (9,863)   (7,412)  (11,524)  (44,256)  (27,333)    Acquisition of     intangible asset           (550)      -         -        (550)     (585)    Acquisitions of content     library                 (56,406)  (39,452)  (56,289) (221,752) (169,528)    Proceeds from sale of     DVDs                      3,884     4,760     3,977    21,640    12,886    Proceeds from disposal     of property and     equipment                    15       -         -          15        23    Other assets                (497)      615      (804)      282    (1,332)         Net cash used in          investing          activities         (63,192)  (52,197)  (64,640) (449,129) (185,869)    Cash flows from     financing activities:    Proceeds from issuance     of common stock           5,745       417     3,566     9,609   112,964    Excess tax benefits     from stock-based     compensation              4,984     5,170     5,652    26,248    13,217    Repurchases of common     stock                   (34,310)  (35,333)      -     (99,858)      -         Net cash (used in)          provided by          financing          activities         (23,581)  (29,746)    9,218   (64,001)  126,181    Net increase (decrease)     in cash and cash     equivalents              (2,365)   (4,378)   31,689  (222,991)  188,174    Cash and cash     equivalents, beginning     of period               179,804   184,182   368,741   400,430   212,256    Cash and cash     equivalents, end of     period                 $177,439  $179,804  $400,430  $177,439  $400,430    Non-GAAP free cash flow    reconciliation:    Net cash provided by     operating activities    $84,408   $77,565   $87,111  $290,139  $247,862    Purchases of property     and equipment            (9,863)   (7,412)  (11,524)  (44,256)  (27,333)    Acquisition of     intangible asset           (550)      -         -        (550)     (585)    Acquisitions of content     library                 (56,406)  (39,452)  (56,289) (221,752) (169,528)    Proceeds from sale of     DVDs                      3,884     4,760     3,977    21,640    12,886    Proceeds from disposal     of property and equipment    15       -         -          15        23    Other assets                (497)      615      (804)      282    (1,332)    Non-GAAP free cash flow  $20,991   $36,076   $22,471   $45,518   $61,993      Netflix, Inc.   Consolidated Other data   (unaudited)  

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

                                               As of / Three Months Ended                                           December     September    December                                              31,          30,          31,                                             2007         2007         2006   Subscriber information:    Subscribers: beginning of period         7,028        6,742       5,662    Gross subscribers additions:     during period                           1,495        1,297       1,493      Gross subscriber additions year-       to-year change                          0.1%        (1.0%)      29.2%      Gross subscriber additions       quarter-to-quarter sequential change   15.3%        26.2%       14.0%    Less subscriber cancellations:     during period                          (1,044)      (1,011)       (839)    Subscribers: end of period               7,479        7,028       6,316    Subscribers year-to-year change           18.4%        24.1%       51.1%    Subscribers quarter-to-quarter     sequential change                         6.4%         4.2%       11.6%   Free subscribers: end of period             153          183         162    Free subscribers as percentage of     ending subscribers                        2.0%         2.6%        2.6%   Paid subscribers: end of period           7,326        6,845       6,154    Paid subscribers year-to-year     change                                   19.0%        24.7%       52.9%    Paid subscribers quarter-to-     quarter sequential change                 7.0%         3.6%       12.1%   Average monthly revenue per paying    subscriber                              $14.22       $14.57      $15.87   Churn                                       4.1%         4.2%        3.9%   Subscriber acquisition cost              $34.60       $37.91      $44.31   Margins:    Gross margin                              33.8%        33.9%       38.9%    Operating margin                           6.7%         7.4%        6.7%    Net margin                                 5.2%         5.4%        5.4%   Expenses as percentage of revenues:    Technology and development                 6.1%         6.2%        4.8%    Marketing                                 17.1%        16.7%       23.9%    General and administrative                 4.5%         4.4%        4.0%    Gain on disposal of DVDs                  (0.5%)       (0.8%)      (0.5%)     Total operating expenses                 27.2%        26.5%       32.2%   Year-to-year change:    Total revenues                             9.1%        14.9%       43.6%    Fulfillment                               17.2%        30.4%       39.5%    Technology and development                40.6%        52.7%       43.2%    Marketing                                (21.8%)      (17.2%)      39.0%    General and administrative                22.1%        29.6%      (14.5%)    Gain on disposal of DVDs                  30.1%       102.3%       65.5%     Total operating expenses                 (7.9%)       (2.7%)      29.2%  

First Call Analyst:
FCMN Contact: jdonadio@netflix.com

Source: Netflix, Inc.

CONTACT: IR, Deborah Crawford, VP of Investor Relations,
+1-408-540-3712, or PR, Steve Swasey, VP of Corporate Communications,
+1-408-540-3947, both of Netflix

Web site: http://www.netflix.com/

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