Netflix Announces Q2 2008 Financial Results

Netflix Announces Q2 2008 Financial Results

Subscribers - 8.4 million

Revenue - $337.6 million

GAAP Net Income - $26.6 million

GAAP EPS - $0.42 per diluted share

LOS GATOS, Calif., July 25 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2008.

"We are pleased to announce another quarter of strong financial results," said Reed Hastings, Netflix co-founder and chief executive officer.

"This quarter we delivered 25 percent year-over-year growth in subscribers, our lowest SAC ever as a public company, and a 14 percent increase in EPS for the quarter. And we made important progress on our strategy of offering our subscribers the option of streaming video directly to their TVs with the introduction of The Netflix Player by Roku(TM) in May and the announcement earlier this month of our agreement with Microsoft to embed Netflix streaming capability in the Xbox 360 video game and entertainment system."

Second-Quarter 2008 Financial Highlights

Subscribers. Netflix ended the second quarter of 2008 with approximately 8,411,000 total subscribers, representing 25 percent year-over-year growth from 6,742,000 total subscribers at the end of the second quarter of 2007 and 2 percent sequential growth from 8,243,000 subscribers at the end of the first quarter of 2008.

Net subscriber change in the quarter was an increase of 168,000, compared to a decrease of 55,000 for the same period of 2007 and an increase of 764,000 for the first quarter of 2008.

Gross subscriber additions for the quarter totaled 1,384,000, representing 35 percent year-over-year growth from 1,028,000 gross subscriber additions in the second quarter of 2007 and 26 percent quarter-over-quarter decline from 1,862,000 gross subscriber additions in the first quarter of 2008.

Of the 8,411,000 total subscribers at quarter end, 98 percent, or 8,235,000 were paid subscribers. The other 2 percent, or 176,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2007 and at the end of the first quarter of 2008.

Revenue for the second quarter of 2008 was $337.6 million, representing 11 percent year-over-year growth from $303.7 million for the second quarter of 2007, and 4 percent sequential increase from $326.2 million for the first quarter of 2008.

Gross margin (1) for the second quarter of 2008 was 31.8 percent, compared to 35.2 percent for the second quarter of 2007 and 31.7 percent for the first quarter of 2008.

GAAP net income for the second quarter of 2008 was $26.6 million, or $0.42 per diluted share, compared to GAAP net income of $25.6 million, or $0.37 per diluted share, for the second quarter of 2007 and GAAP net income of $13.4 million, or $0.21 per diluted share, for the first quarter of 2008. GAAP net income grew 4 percent on a year-over-year basis and GAAP EPS grew 14 percent on a year-over-year basis.

Non-GAAP net income was $28.7 million, or $0.45 per diluted share, for the second quarter of 2008, compared to non-GAAP net income of $27.2 million, or $0.39 per diluted share, for the second quarter of 2007 and non-GAAP net income of $15.2 million, or $0.23 per diluted share, for the first quarter of 2008. Non-GAAP net income grew 5 percent on a year-over-year basis and non- GAAP EPS grew 15 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 for the second quarter of 2008 was $2.9 million, compared to $2.8 million in the second quarter of 2007 and $3.1 million in the first quarter of 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 cost(2) for the second quarter of 2008 was $28.95 per gross subscriber addition, compared to $44.02 for the same period of 2007 and $29.50 for the first quarter of 2008.

Churn(3) for the second quarter of 2008 was 4.2 percent, compared to 4.6 percent for the second quarter of 2007 and 3.9 percent for the first quarter of 2008. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Free cash flow(4) for the second quarter of 2008 was $12.5 million, compared to $6.5 million in the second quarter of 2007 and $4.7 million for the first quarter of 2008.

Cash provided by operating activities for the second quarter of 2008 was $77.9 million, compared to $65.1 million for the second quarter of 2007 and $77.7 million for the first quarter of 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.   (3) Churn is defined as customer cancellations in the quarter divided by       the sum of beginning subscribers and gross subscriber additions,       divided by three months.   (4) Free cash flow is defined as cash provided by operating activities       excluding 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.     Business Outlook  

The Company's performance expectations for the third and fourth quarters of 2008 and full-year 2008 are as follows:

   Third-Quarter 2008   -- Ending subscribers of 8.675 million to 8.875 million   -- Revenue of $343 million to $348 million   -- GAAP net income of $16 million to $21 million   -- GAAP EPS of $0.26 to $0.34 per diluted share     Fourth-Quarter 2008   -- Ending subscribers of 9.1 million to 9.7 million   -- Revenue of $357 million to $367 million   -- GAAP net income of $18 million to $23 million   -- GAAP EPS of $0.29 to $0.37 per diluted share     Full-Year 2008   -- Ending subscribers of 9.1 million to 9.7 million, unchanged from prior      guidance   -- Revenue of $1.364 billion to $1.379 billion, tightened from $1.35      billion to $1.39 billion   -- GAAP net income of $75 million to $83 million, unchanged from prior      guidance   -- GAAP EPS of $1.19 to $1.31 per diluted share, increased from $1.16 to      $1.29 per diluted share     Float and Trading Plans  

The Company estimates the public float at approximately 49,996,277 shares as of June 30, 2008, up approximately 1 percent from 49,498,642 shares as of March 31, 2008, 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 8:30 a.m. Eastern Time / 5:30 a.m. Pacific Time, and may be accessed at http://ir.netflix.com/. The call will consist of prepared remarks, followed by a 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 in the hour allotted to the earnings call.

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 8:30 a.m. Pacific Time on July 25, 2008 through July 29, 2008 at 9:00 p.m. Pacific Time. To listen to the telephone replay, call (719) 457-0820, access code 4599200.

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

Netflix, Inc (NASDAQ:NFLX) is the world's largest online movie rental service, providing more than eight million subscribers access to over 100,000 DVD titles plus a growing library of over 12,000 titles 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 more than 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 third and fourth quarters 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, 2008. 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,                              2008      2008      2007      2008      2007    Revenues                 $337,614  $326,183  $303,693  $663,797  $609,013   Cost of revenues:     Subscription            193,769   187,156   166,838   380,925   332,027     Fulfillment expenses *   36,318    35,649    29,855    71,967    59,638       Total cost of        revenues             230,087   222,805   196,693   452,892   391,665   Gross profit              107,527   103,378   107,000   210,905   217,348   Operating expenses:     Technology and      development *           22,670    20,516    18,907    43,186    34,622     Marketing *              40,062    54,936    45,255    94,998   117,393     General and      administrative *        13,568    13,816    13,847    27,384    26,035     Gain on disposal of      DVDs                    (2,263)     (833)   (2,282)   (3,096)   (3,190)     Gain on legal      settlement                 -         -      (7,000)      -      (7,000)       Total operating        expenses              74,037    88,435    68,727   162,472   167,860   Operating income           33,490    14,943    38,273    48,433    49,488   Other income (expense):     Interest and other      income (expense)         2,404     7,660     4,972    10,064    10,322   Income before income    taxes                     35,894    22,603    43,245    58,497    59,810   Provision for income    taxes                      9,333     9,225    17,665    18,558    24,366   Net income                $26,561   $13,378   $25,580   $39,939   $35,444   Net income per share:     Basic                     $0.43     $0.21     $0.38     $0.64     $0.52     Diluted                   $0.42     $0.21     $0.37     $0.62     $0.50   Weighted average common    shares outstanding:     Basic                    61,782    62,776    68,031    62,262    68,360     Diluted                  63,857    64,840    69,891    64,341    70,276    *Stock-based compensation     included in expense     line items:     Fulfillment expenses       $108      $106       $82      $214      $228     Technology and      development                849       996       831     1,845     1,588     Marketing                   455       509       521       964     1,052     General and      administrative           1,493     1,519     1,384     3,012     2,753    Reconciliation of Non-    GAAP Financial Measures   (unaudited)   Non-GAAP net income    reconciliation:   GAAP net income           $26,561   $13,378   $25,580   $39,939   $35,444     Stock-based      compensation             2,905     3,130     2,818     6,035     5,621     Income tax effect of      stock-based      compensation              (755)   (1,277)   (1,150)   (2,032)   (2,284)   Non-GAAP net income       $28,711   $15,231   $27,248   $43,942   $38,781   Non-GAAP net income per    share:     Basic                     $0.46     $0.24     $0.40     $0.71     $0.57     Diluted                   $0.45     $0.23     $0.39     $0.68     $0.55   Weighted average common    shares outstanding:     Basic                    61,782    62,776    68,031    62,262    68,360     Diluted                  63,857    64,840    69,891    64,341    70,276      Netflix, Inc.   Consolidated Balance Sheets   (unaudited)   (in thousands, except share and par value data)                                                          As of                                                June 30,         December 31,                                                  2008               2007   Assets   Current assets:     Cash and cash equivalents                  $144,289           $177,439     Short-term investments                      169,175            207,703     Prepaid expenses                              7,631              6,116     Prepaid revenue sharing expenses             14,861              6,983     Deferred tax assets                           3,339              2,254     Other current assets                         19,859             16,037        Total current assets                     359,154            416,532   Content library, net                          126,928            132,455   Property and equipment, net                    90,779             77,326   Deferred tax assets                            18,988             16,242   Other assets                                   10,767              4,465        Total assets                            $606,616           $647,020   Liabilities and Stockholders' Equity   Current liabilities:     Accounts payable                           $109,000           $104,445     Accrued expenses                             27,462             36,466     Deferred revenue                             67,886             71,665        Total current liabilities                204,348            212,576   Other liabilities                              11,853              3,695        Total liabilities                        216,201            216,271   Stockholders' equity:    Common stock, $0.001 par value;     160,000,000 shares authorized     at June 30, 2008 and December 31,     2007; 61,910,603 and 64,912,915     issued and outstanding at June     30, 2008 and December 31, 2007,     respectively                                     62                 65    Additional paid-in capital                   324,865            402,710    Accumulated other comprehensive     (loss) income                                  (814)             1,611    Retained earnings                             66,302             26,363        Total stockholders' equity               390,415            430,749        Total liabilities and         stockholders' equity                   $606,616           $647,020      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,                              2008      2008      2007      2008      2007    Cash flows from     operating activities:    Net income               $26,561   $13,378   $25,580   $39,939   $35,444    Adjustments to     reconcile net income     to net cash provided by     operating activities:      Depreciation and       amortization of       property, equipment       and intangibles         7,849     6,359     5,151    14,208     9,776      Amortization of       content library        57,012    57,570    50,985   114,582   100,427      Amortization of       discounts and       premiums on       investments               177       139        11       316       (71)      Stock-based       compensation expense    2,905     3,130     2,818     6,035     5,621      Excess tax benefits       from stock-based       compensation           (2,554)     (820)  (12,018)   (3,374)  (16,094)      Gain on sale of       short-term       investments                78    (4,320)      (47)   (4,242)     (194)      Gain on disposal of       DVDs                   (4,059)   (2,592)   (5,197)   (6,651)   (7,794)      Deferred taxes          (2,514)     (836)     (505)   (3,350)     (760)      Changes in operating       assets and       liabilities:       Prepaid expenses and        other current        assets               (10,659)    2,562     5,660    (8,097)   (4,606)       Accounts payable        9,124    (1,199)  (17,834)    7,925    (6,435)       Accrued expenses      (14,551)    7,827    14,244    (6,724)   21,943       Deferred revenue         (489)   (3,290)   (3,712)   (3,779)   (9,156)       Other assets and        liabilities            9,035      (161)        1     8,874        65         Net cash provided          by operating          activities          77,915    77,747    65,137   155,662   128,166    Cash flows from     investing activities:    Purchases of short-term     investments             (65,937)  (91,954)  (53,906) (157,891) (318,140)    Proceeds from sale of     short-term investments   21,682   175,319    28,693   197,001   124,115    Purchases of property     and equipment           (14,662)  (12,431)   (8,968)  (27,093)  (26,981)    Acquisition of     intangible asset         (1,000)      -         -      (1,000)      -    Acquisitions of content     library                 (55,175)  (65,123)  (57,353) (120,298) (125,894)    Proceeds from sale of     DVDs                      5,379     4,507     7,370     9,886    12,996    Investment in business       -      (6,000)      -      (6,000)      -    Other assets                  20         8       267        28       164         Net cash (used in)          provided by          investing          activities        (109,693)    4,326   (83,897) (105,367) (333,740)    Cash flows from     financing activities:    Proceeds from issuance     of common stock           4,524     8,542     2,681    13,066     3,447    Excess tax benefits     from stock-based     compensation              2,554       820    12,018     3,374    16,094    Repurchases of common     stock                       -     (99,885)  (30,215)  (99,885)  (30,215)         Net cash provided          by (used in)          financing          activities           7,078   (90,523)  (15,516)  (83,445)  (10,674)    Net decrease in cash     and cash equivalents    (24,700)   (8,450)  (34,276)  (33,150) (216,248)    Cash and cash     equivalents, beginning     of period               168,989   177,439   218,458   177,439   400,430    Cash and cash     equivalents, end of     period                 $144,289  $168,989  $184,182  $144,289  $184,182    Non-GAAP free cash flow    reconciliation:    Net cash provided by     operating activities    $77,915   $77,747   $65,137  $155,662  $128,166    Purchases of property     and equipment           (14,662)  (12,431)   (8,968)  (27,093)  (26,981)    Acquisition of     intangible asset         (1,000)      -         -      (1,000)      -    Acquisitions of content     library                 (55,175)  (65,123)  (57,353) (120,298) (125,894)    Proceeds from sale of     DVDs                      5,379     4,507     7,370     9,886    12,996    Other assets                  20         8       267        28       164    Non-GAAP free cash flow  $12,477    $4,708    $6,453   $17,185  $(11,549)      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                                           June 30,    March 31,     June 30,                                             2008         2008         2007   Subscriber information:    Subscribers: beginning of period         8,243        7,479        6,797    Gross subscriber additions: during     period                                  1,384        1,862        1,028     Gross subscriber additions year-      to-year change                         34.6%        22.5%        (3.9%)     Gross subscriber additions      quarter-to-quarter sequential      change                                (25.7%)       24.5%       (32.4%)    Less subscriber cancellations:     during period                          (1,216)      (1,098)      (1,083)    Subscribers: end of period               8,411        8,243        6,742    Subscribers year-to-year change          24.8%        21.3%        30.4%    Subscribers quarter-to-quarter     sequential change                        2.0%        10.2%        (0.8%)   Free subscribers: end of period             176          141          133    Free subscribers as percentage of     ending subscribers                       2.1%         1.7%         2.0%   Paid subscribers: end of period           8,235        8,102        6,609    Paid subscribers year-to-year     change                                  24.6%        21.4%        31.7%    Paid subscribers quarter-to-     quarter sequential change                1.6%        10.6%        (1.0%)   Average monthly revenue per paying    subscriber                              $13.78       $14.09       $15.24   Churn                                      4.2%         3.9%         4.6%   Subscriber acquisition cost              $28.95       $29.50       $44.02   Margins:    Gross margin                             31.8%        31.7%        35.2%    Operating margin                          9.9%         4.6%        12.6%    Net margin                                7.9%         4.1%         8.4%   Expenses as percentage of revenues:    Technology and development                6.7%         6.3%         6.2%    Marketing                                11.9%        16.8%        14.9%    General and administrative                4.0%         4.2%         4.6%    Gain on disposal of DVDs                 (0.7%)       (0.2%)       (0.8%)    Gain on legal settlement                   -            -          (2.3%)     Total operating expenses                21.9%        27.1%        22.6%   Year-to-year change:    Total revenues                           11.2%         6.8%        26.9%    Fulfillment expenses                     21.6%        19.7%        35.9%    Technology and development               19.9%        30.6%        57.0%    Marketing                               (11.5%)      (23.8%)       (3.8%)    General and administrative               (2.0%)       13.4%       104.4%    Gain on disposal of DVDs                 (0.8%)       (8.3%)      136.7%     Total operating expenses                 7.7%       (10.8%)        5.9%  

First Call Analyst:
FCMN Contact:

Source: Netflix, Inc.

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

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

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