Netflix Announces Q4 2008 Financial Results

Netflix Announces Q4 2008 Financial Results

Subscribers - 9.4 million

Revenue - $359.6 million

GAAP Net Income - $22.7 million

GAAP EPS - $0.38 per diluted share

LOS GATOS, Calif., Jan. 26 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2008.

"Consumers embraced the Netflix experience in near record numbers last quarter," said Reed Hastings, Netflix co-founder and chief executive officer, "with growth in our core DVD offering and growing momentum with internet streaming."

Fourth-Quarter and Fiscal-Year 2008 Financial Highlights

Subscribers. Netflix ended the fourth quarter of 2008 with approximately 9,390,000 total subscribers, representing 26 percent year-over-year growth from 7,479,000 total subscribers at the end of the fourth quarter of 2007 and 8 percent sequential growth from 8,672,000 subscribers at the end of the third quarter of 2008.

Net subscriber change in the quarter was an increase of 718,000 compared to an increase of 451,000 for the same period of 2007 and an increase of 261,000 for the third quarter of 2008.

Gross subscriber additions for the quarter totaled 2,085,000, representing 39 percent year-over-year growth from 1,495,000 gross subscriber additions in the fourth quarter of 2007 and 36 percent quarter-over-quarter growth from 1,528,000 gross subscriber additions in the third quarter of 2008.

Of the 9,390,000 total subscribers at quarter end, 98 percent, or 9,164,000, were paid subscribers. The other 2 percent, or 226,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the fourth quarter of 2007 and at the end of the third quarter of 2008.

Revenue for the fourth quarter of 2008 was $359.6 million, representing 19 percent year-over-year growth from $302.4 million for the fourth quarter of 2007, and a 5 percent sequential increase from $341.3 million for the third quarter of 2008. Revenue for fiscal 2008 was $1.365 billion, up 13 percent from $1.205 billion for fiscal 2007.

Gross margin(1) for the fourth quarter of 2008 was 35.2 percent compared to 33.8 percent for the fourth quarter of 2007 and 34.2 percent for the third quarter of 2008. Gross margin for fiscal 2008 was 33.3 percent compared to 34.8 percent for fiscal 2007.

GAAP net income for the fourth quarter of 2008 was $22.7 million, or $0.38 per diluted share compared to GAAP net income of $15.7 million, or $0.23 per diluted share, for the fourth quarter of 2007 and GAAP net income of $20.4 million, or $0.33 per diluted share, for the third quarter of 2008. GAAP net income grew 45 percent on a year-over-year basis and GAAP EPS grew 65 percent on a year-over-year basis.

GAAP net income for fiscal 2008 was $83.0 million, or $1.32 per diluted share compared to GAAP net income of $66.6 million, or $0.97 per diluted share, for fiscal 2007. GAAP net income grew 25 percent on a year-over-year basis and GAAP EPS grew 36 percent on a year-over-year basis.

Non-GAAP net income was $24.6 million, or $0.41 per diluted share, for the fourth quarter of 2008 compared to non-GAAP net income of $17.7 million, or $0.26 per diluted share, for the fourth quarter of 2007 and non-GAAP net income of $22.1 million, or $0.36 per diluted share, for the third quarter of 2008. Non-GAAP net income grew 39 percent on a year-over-year basis and non-GAAP EPS grew 58 percent on a year-over-year basis.

Non-GAAP net income was $90.7 million, or $1.44 per diluted share, for fiscal 2008 compared to non-GAAP net income of $73.8 million, or $1.07 per diluted share, for fiscal 2007. Non-GAAP net income grew 23 percent on a year-over-year basis and non-GAAP EPS grew 35 percent on a year-over-year basis.

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

Stock-based compensation was $3.2 million for the fourth quarter of 2008 and the fourth quarter of 2007 and $3.0 million for the third quarter of 2008. Stock-based compensation for fiscal 2008 was $12.3 million compared to $12.0 million for fiscal 2007. 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 fourth quarter of 2008 was $26.67 per gross subscriber addition compared to $34.58 for the same period of 2007 and $32.21 for the third quarter of 2008. SAC for fiscal 2008 was $29.12 per gross subscriber addition compared to $40.86 for fiscal 2007.

Churn(3) for the fourth quarter of 2008 was 4.2 percent compared to 4.1 percent for the fourth quarter of 2007 and 4.2 percent for the third 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 fourth quarter of 2008 was $51.0 million compared to $21.1 million in the fourth quarter of 2007 and $26.2 million for the third quarter of 2008. Free cash flow for fiscal 2008 was $94.7 million compared to $45.9 million in fiscal 2007.

   (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 and       investing activities excluding the non-operational cash flows from       purchases and sales of short-term investments and cash flows from       investment in business.    

Cash provided by operating activities for the fourth quarter of 2008 was $92.1 million compared to $87.6 million for the fourth quarter of 2007 and $60.5 million for the third quarter of 2008. Cash provided by operating activities for fiscal 2008 was $284.0 million compared to $277.4 million for fiscal 2007.

Stock Buyback

The Company also is announcing today that its Board of Directors has authorized a stock repurchase program for 2009. Based on the Board's authorization, the Company anticipates a repurchase program of up to $175 million.

Stock repurchases under this program may be made through open market transactions and, from time to time, privately negotiated transactions with third parties, and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. Repurchased shares would be returned to the status of authorized but un-issued shares of common stock.

Business Outlook

The Company's performance expectations for the first quarter of 2009 and full-year 2009 are as follows:

   First-Quarter 2009    -- Ending subscribers of 10.1 million to 10.3 million   -- Revenue of $387 million to $393 million   -- GAAP net income of $15 million to $20 million   -- GAAP EPS of $0.25 to $0.33 per diluted share     Full-Year 2009    -- Ending subscribers of 10.6 million to 11.3 million   -- Revenue of $1.58 billion to $1.635 billion   -- GAAP net income of $88 million to $98 million   -- GAAP EPS of $1.43 to $1.59 per diluted share     Float and Trading Plans  

The Company estimates the public float at approximately 50,150,991 shares as of December 31, 2008, up slightly from 50,148,071 shares as of September 30, 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 5:00 p.m. Eastern Time / 2:00 p.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.

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 26, 2009 through midnight on January 29, 2009. To listen to a replay, call (719) 457-0820, access code 8834367.

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, with more than nine million subscribers. For one low monthly price, Netflix members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs, all in unlimited amounts. Members can choose from over 100,000 DVD titles and a growing library of more than 12,000 choices that can be watched instantly. There are never any due dates or late fees. DVDs are delivered free to members by first class mail, with a postage-paid return envelope, from more than 55 distribution centers. More than 95 percent of Netflix members live in areas that generally receive shipments in one business day. Netflix is also partnering with leading consumer electronics companies to offer a range of devices that can instantly stream movies and TV episodes to members' TVs from Netflix. 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 2009 and the full-year 2009 as well as the anticipated size of our 2009 stock repurchase program. 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, especially in the current uncertain economic environment; 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 deterioration of 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; customer 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 and, with respect to the stock repurchase program, changes in cash flows, cash balances, economic and market conditions, stock price and additional Board action. 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         Twelve Months Ended                       December  September  December   December    December                          31,       30,        31,        31,         31,                         2008      2008       2007       2008        2007    Revenues             $359,595  $341,269  $302,355  $1,364,661  $1,205,340   Cost of revenues:     Subscription        193,635   186,573   168,673     761,133     664,407     Fulfillment      expenses *          39,211    37,923    31,377     149,101     121,761       Total cost of        revenues         232,846   224,496   200,050     910,234     786,168   Gross profit          126,749   116,773   102,305     454,427     419,172   Operating expenses:     Technology and      development *       24,052    23,368    18,453      89,873      70,979     Marketing *          55,617    49,217    51,704     199,713     218,212     General and      administrative *    10,762    11,742    13,570      49,662      52,404     Gain on disposal      of DVDs             (1,603)   (1,628)   (1,696)     (6,327)     (7,196)     Gain on legal      settlement              --        --        --          --      (7,000)       Total operating        expenses          88,828    82,699    82,031     332,921     327,399   Operating income       37,921    34,074    20,274     121,506      91,773   Other income    (expense):     Interest expense      on lease financing      obligations           (677)     (677)     (295)     (2,458)     (1,188)     Interest and other      income (expense)       852     1,536     4,929      12,452      20,340   Income before income    taxes                 38,096    34,933    24,908     131,500     110,925   Provision for income    taxes                 15,364    14,562     9,217      48,474      44,317   Net income            $22,732   $20,371   $15,691     $83,026     $66,608   Net income per    share:     Basic                 $0.39     $0.34     $0.24       $1.36       $0.99     Diluted               $0.38     $0.33     $0.23       $1.32       $0.97   Weighted average    common shares    outstanding:     Basic                58,906    60,408    65,156      60,961      67,076     Diluted              60,311    62,272    67,042      62,836      68,902    * Stock-based    compensation    included in    expense line items:     Fulfillment expenses   $126      $126      $100        $466        $427     Technology and      development          1,095       950     1,105       3,890       3,695     Marketing               462       460       561       1,886       2,160     General and      administrative       1,511     1,499     1,476       6,022       5,694    Reconciliation of    Non-GAAP Financial    Measures (unaudited)   Non-GAAP net income    reconciliation:   GAAP net income       $22,732   $20,371   $15,691     $83,026     $66,608     Stock-based      compensation         3,194     3,035     3,242      12,264      11,976     Income tax effect      of stock-based      compensation        (1,287)   (1,266)   (1,200)     (4,585)     (4,760)   Non-GAAP net income   $24,639   $22,140   $17,733     $90,705     $73,824   Non-GAAP net income    per share:     Basic                 $0.42     $0.37     $0.27       $1.49       $1.10     Diluted               $0.41     $0.36     $0.26       $1.44       $1.07   Weighted average    common shares    outstanding:     Basic                58,906    60,408    65,156      60,961      67,076     Diluted              60,311    62,272    67,042      62,836      68,902      Netflix, Inc.   Consolidated Balance Sheets   (unaudited)   (in thousands, except share and par value data)                                                            As of                                                December 31,     December 31,                                                    2008              2007*   Assets   Current assets:     Cash and cash equivalents                    $139,881           $177,439     Short-term investments                        157,390            207,703     Prepaid expenses                                8,122              6,116     Prepaid revenue sharing expenses               18,417              6,983     Current content library, net                   18,691             16,301     Deferred tax assets                             5,617              2,254     Other current assets                           13,329             15,627       Total current assets                        361,447            432,423   Content library, net                             98,547            112,070   Property and equipment, net                     124,948            113,175   Deferred tax assets                              22,409             16,865   Other assets                                     10,595              4,465       Total assets                               $617,946           $678,998   Liabilities and Stockholders' Equity   Current liabilities:     Accounts payable                             $100,344            $99,951     Accrued expenses                               31,394             36,466     Current portion lease financing obligations     1,152                823     Deferred revenue                               83,127             71,665       Total current liabilities                   216,017            208,905   Lease financing obligations, excluding    current portion                                 37,988             35,652   Other liabilities                                16,786              4,629       Total liabilities                           270,791            249,186   Stockholders' equity:     Common stock, $0.001 par value; 160,000,000      shares authorized at December 31, 2008 and      December 31, 2007; 58,862,478 and      64,912,915 issued and outstanding at      December 31, 2008 and December 31, 2007,      respectively                                      62                 65     Additional paid-in capital                    338,577            402,710     Treasury stock at cost (3,491,084 shares)    (100,020)                --     Accumulated other comprehensive income             84              1,611     Retained earnings                             108,452             25,426       Total stockholders' equity                  347,155            429,812       Total liabilities and stockholders' equity $617,946           $678,998    * Certain amounts have been reclassified for the change in the accounting     for the streaming content portion of our content library.      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,                             2008      2008*     2007*     2008      2007*   Cash flows from    operating activities:   Net income               $22,732   $20,371   $15,691   $83,026   $66,608   Adjustments to    reconcile net income    to net cash provided    by operating    activities:     Depreciation and      amortization of      property, equipment      and intangibles         9,141     8,643     6,162    32,454    22,219     Amortization of      content library        47,579    47,596    54,751   209,757   203,415     Amortization of      discounts and      premiums on      investments               185       122        72       623        24     Stock-based      compensation expense    3,193     3,035     3,242    12,263    11,976     Excess tax benefits      from stock-based      compensation             (753)   (1,093)   (4,984)   (5,220)  (26,248)     Loss (gain) on      disposal of property      and equipment              --        (1)       14       101       142     Loss (gain) on sale      of short-term      investments               618       494      (323)   (3,130)     (687)     Gain on disposal of      DVDs                   (3,494)   (3,205)   (2,906)  (13,350)  (14,637)     Deferred taxes          (1,172)   (3,894)      342    (8,427)     (893)     Changes in operating      assets and      liabilities:       Prepaid expenses and        other current assets 11,038    (7,022)     (816)   (4,181)   (3,893)       Content library      (11,123)   (5,773)  (15,348)  (48,290)  (34,821)       Accounts payable      (7,917)     (744)   15,091     7,111    16,555       Accrued expenses         171     4,730      (567)   (1,823)   32,809       Deferred revenue      17,232    (1,989)   15,344    11,464     1,987       Other assets and        liabilities           4,670      (775)    1,842    11,659     2,868         Net cash provided          by operating          activities         92,100    60,495    87,607   284,037   277,424   Cash flows from    investing activities:   Purchases of short-term    investments             (76,118)  (22,950)  (35,228) (256,959) (405,340)   Proceeds from sale of    short-term investments   59,723    50,609    35,453   307,333   200,832   Purchases of property    and equipment            (7,471)   (9,226)   (9,863)  (43,790)  (44,256)   Acquisition of    intangible asset             --       (62)     (550)   (1,062)     (550)   Acquisitions of content    library                 (38,295)  (28,828)  (59,505) (162,849) (208,647)   Proceeds from sale of    DVDs                      4,695     3,787     3,884    18,368    21,640   Investment in business        --        --        --    (6,000)       --   Other assets                 (32)        3      (482)       (1)      297         Net cash used in          investing          activities        (57,498)   (6,667)  (66,291) (144,960) (436,024)   Cash flows from    financing activities:   Principal payments of    lease financing    obligations                (237)     (234)     (100)     (823)     (390)   Proceeds from issuance    of common stock           3,231     2,576     5,745    18,873     9,611   Excess tax benefits    from stock-based    compensation                753     1,093     4,984     5,220    26,248   Repurchases of common    stock                    (9,992)  (90,028)  (34,310) (199,905)  (99,860)        Net cash used in         financing         activities          (6,245)  (86,593)  (23,681) (176,635)  (64,391)   Net increase (decrease)    in cash and cash    equivalents              28,357   (32,765)   (2,365)  (37,558) (222,991)   Cash and cash    equivalents, beginning    of period               111,524   144,289   179,804   177,439   400,430   Cash and cash    equivalents, end of    period                 $139,881  $111,524  $177,439  $139,881  $177,439    Non-GAAP free cash flow    reconciliation:   Net cash provided by    operating activities    $92,100   $60,495   $87,607  $284,037  $277,424   Purchases of property    and equipment            (7,471)   (9,226)   (9,863)  (43,790)  (44,256)   Acquisition of    intangible asset             --       (62)     (550)   (1,062)     (550)   Acquisitions of content    library                 (38,295)  (28,828)  (59,505) (162,849) (208,647)   Proceeds from sale of    DVDs                      4,695     3,787     3,884    18,368    21,640   Other assets                 (32)        3      (482)       (1)      297   Non-GAAP free cash flow  $50,997   $26,169   $21,091   $94,703   $45,908    * Certain amounts have been reclassified for the change in the accounting     for the streaming content portion of our content library.      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, 2008      30, 2008    31, 2007    Subscriber information:     Subscribers: beginning of period        8,672        8,411        7,028     Gross subscriber additions: during      period                                 2,085        1,528        1,495       Gross subscriber additions        year-to-year change                  39.5%        17.8%         0.1%       Gross subscriber additions        quarter-to-quarter sequential         change                              36.5%        10.4%        15.3%     Less subscriber cancellations:      during period                         (1,367)      (1,267)      (1,044)     Subscribers: end of period              9,390        8,672        7,479       Subscribers year-to-year change       25.6%        23.4%        18.4%       Subscribers quarter-to-quarter        sequential change                     8.3%         3.1%         6.4%     Free subscribers: end of period           226          182          153       Free subscribers as percentage of        ending subscribers                    2.4%         2.1%         2.0%     Paid subscribers: end of period         9,164        8,490        7,326       Paid subscribers year-to-year change  25.1%        24.0%        19.0%       Paid subscribers quarter-to-quarter        sequential change                     7.9%         3.1%         7.0%     Average monthly revenue per paying      subscriber                            $13.58       $13.60       $14.22     Churn                                    4.2%         4.2%         4.1%     Subscriber acquisition cost            $26.67       $32.21       $34.58   Margins:     Gross margin                            35.2%        34.2%        33.8%     Operating margin                        10.5%        10.0%         6.7%     Net margin                               6.3%         6.0%         5.2%   Expenses as percentage of revenues:     Technology and development               6.7%         6.8%         6.1%     Marketing                               15.5%        14.4%        17.1%     General and administrative               3.0%         3.4%         4.5%     Gain on disposal of DVDs                (0.5%)       (0.4%)       (0.5%)       Total operating expenses              24.7%        24.2%        27.2%   Year-to-year change:     Total revenues                          18.9%        16.1%         9.1%     Fulfillment expenses                    25.0%        23.3%        17.2%     Technology and development              30.3%        29.0%        40.9%     Marketing                                7.6%         0.1%       (21.8%)     General and administrative             (20.7%)       (8.7%)       22.1%     Gain on disposal of DVDs                (5.5%)      (29.5%)       30.1%       Total operating expenses               8.3%         6.3%        (7.9%)  

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

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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