Netflix Announces Q2 2009 Financial Results
Netflix Announces Q2 2009 Financial Results
Subscribers - 10.6 million Revenue - $408.5 million GAAP Net Income - $32.4 million GAAP EPS - $0.54 per diluted share
LOS GATOS, Calif., July 23 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2009.
"We continued to execute very well in the second quarter and are on track to deliver a record 2009," said Reed Hastings, Netflix co-founder and chief executive officer. "As our subscriber base and disc shipments continue to expand, and as we offer more opportunities to watch instantly via the Internet, we believe we are striking the right balance between growth, investment and earnings."
Second-Quarter 2009 Financial Highlights
Subscribers. Netflix ended the second quarter of 2009 with approximately 10,599,000 total subscribers, representing 26 percent year-over-year growth from 8,411,000 total subscribers at the end of the second quarter of 2008 and 3 percent sequential growth from 10,310,000 subscribers at the end of the first quarter of 2009.
Net subscriber change in the quarter was an increase of 289,000 compared to an increase of 168,000 for the same period of 2008 and an increase of 920,000 for the first quarter of 2009.
Gross subscriber additions for the quarter totaled 1,936,000, representing 40 percent year-over-year growth from 1,384,000 gross subscriber additions in the second quarter of 2008 and 20 percent quarter-over-quarter decline from 2,413,000 gross subscriber additions in the first quarter of 2009.
Of the 10,599,000 total subscribers at quarter end, 98 percent, or 10,375,000, were paid subscribers. The other 2 percent, or 224,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2008 and at the end of the first quarter of 2009.
Revenue for the second quarter of 2009 was $408.5 million, representing 21 percent year-over-year growth from $337.6 million for the second quarter of 2008, and a 4 percent sequential increase from $394.1 million for the first quarter of 2009.
Gross margin(1) for the second quarter of 2009 was 34.1 percent compared to 31.8 percent for the second quarter of 2008 and 34.2 percent for the first quarter of 2009.
GAAP net income for the second quarter of 2009 was $32.4 million, or $0.54 per diluted share compared to GAAP net income of $26.6 million, or $0.42 per diluted share, for the second quarter of 2008 and GAAP net income of $22.4 million, or $0.37 per diluted share, for the first quarter of 2009. GAAP net income grew 22 percent on a year-over-year basis and GAAP EPS grew 29 percent on a year-over-year basis.
Non-GAAP net income was $34.4 million, or $0.58 per diluted share, for the second quarter of 2009 compared to non-GAAP net income of $28.7 million, or $0.45 per diluted share, for the second quarter of 2008 and non-GAAP net income of $24.2 million, or $0.40 per diluted share, for the first quarter of 2009. Non-GAAP net income grew 20 percent on a year-over-year basis and non-GAAP EPS grew 29 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 $3.3 million for the second quarter of 2009, compared to $2.9 million for the second quarter of 2008 and $3.1 million for the first quarter of 2009. 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 2009 was $23.88 per gross subscriber addition compared to $28.89 for the same period of 2008 and $25.79 for the first quarter of 2009.
Churn(3) for the second quarter of 2009 was 4.5 percent compared to 4.2 percent for the second quarter of 2008 and for the first quarter of 2009. 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 2009 was $26.3 million compared to $12.7 million in the second quarter of 2008 and $15.1 million for the first quarter of 2009.
Cash provided by operating activities for the second quarter of 2009 was $75.3 million compared to $67.4 million for the second quarter of 2008 and $65.6 million for the first quarter of 2009.
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. Business Outlook
The Company's performance expectations for the third and fourth quarters of 2009 and full-year 2009 are as follows:
Third-Quarter 2009 -- Ending subscribers of 10.9 million to 11.1 million -- Revenue of $416 million to $422 million -- GAAP net income of $23 million to $28 million -- GAAP EPS of $0.39 to $0.47 per diluted share Fourth-Quarter 2009 -- Ending subscribers of 11.6 million to 12 million -- Revenue of $431 million to $445 million -- GAAP net income of $21 million to $26 million -- GAAP EPS of $0.36 to $0.44 per diluted share Full-Year 2009 -- Ending subscribers of 11.6 million to 12 million, up from 11.2 million to 11.8 million -- Revenue of $1.65 billion to $1.67 billion, up from $1.63 billion to $1.67 billion -- GAAP net income of $99 million to $109 million, up from $96 million to $106 million -- GAAP EPS of $1.65 to $1.82 per diluted share, up from $1.56 to $1.72 per diluted share Earnings Call
The Netflix earnings call will be webcast today at 6:00 p.m. Eastern Time / 3:00 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 6:00 p.m. Pacific Time on July 23, 2009 through midnight on July 27, 2009. To listen to a replay, call (719) 457-0820, access code 4688984.
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 ten 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 58 distribution centers. More than 97 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 third and fourth quarters of 2009 and the full-year 2009. 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 continued availability of content on terms and conditions acceptable to us; 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; consumer spending on DVDs and related products; disruption in service on our website or with our computer systems; competition and widespread consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2009. 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, 2009 2009 2008 2009 2008 ---- ---- ---- ---- ---- Revenues $408,509 $394,098 $337,614 $802,607 $663,797 Cost of revenues: Subscription 224,858 215,299 193,769 440,157 380,925 Fulfillment expenses * 44,385 43,969 36,318 88,354 71,967 ------ ------ ------ ------ ------ Total cost of revenues 269,243 259,268 230,087 528,511 452,892 ------- ------- ------- ------- ------- Gross profit 139,266 134,830 107,527 274,096 210,905 Operating expenses: Technology and development * 27,119 24,200 22,186 51,319 42,453 Marketing * 46,231 62,242 39,984 108,473 94,879 General and administrative * 13,252 13,014 13,419 26,266 27,158 Gain on disposal of DVDs (118) (1,097) (2,263) (1,215) (3,096) ---- ------ ------ ------ ------ Total operating expenses 86,484 98,359 73,326 184,843 161,394 ------ ------ ------ ------- ------- Operating income 52,782 36,471 34,201 89,253 49,511 Other income (expense): Interest expense on lease financing obligations (674) (670) (681) (1,344) (1,104) Interest and other Income (expense) 866 1,610 2,404 2,476 10,064 --- ----- ----- ----- ------ Income before income taxes 52,974 37,411 35,924 90,385 58,471 Provision for income taxes 20,531 15,048 9,345 35,579 18,548 ------ ------ ----- ------ ------ Net income $32,443 $22,363 $26,579 $54,806 $39,923 ======= ======= ======= ======= ======= Net income per share: Basic $0.56 $0.38 $0.43 $0.94 $0.64 Diluted $0.54 $0.37 $0.42 $0.91 $0.62 Weighted average common shares outstanding: Basic 57,872 58,734 61,782 58,301 62,262 Diluted 59,660 60,709 63,857 60,182 64,341 *Stock-based compensation included in expense line items: Fulfillment expenses $102 $120 $108 $222 $214 Technology and development 1,190 1,071 849 2,261 1,845 Marketing 458 443 455 901 964 General and administrative 1,528 1,498 1,493 3,026 3,012 Reconciliation of Non-GAAP Financial Measures (unaudited) Non-GAAP net income reconciliation: GAAP net income $32,443 $22,363 $26,579 $54,806 $39,923 Stock-based compensation 3,278 3,132 2,905 6,410 6,035 Income tax effect of stock-based compensation (1,272) (1,259) (755) (2,531) (2,032) ------ ------ ---- ------ ------ Non-GAAP net income $34,449 $24,236 $28,729 $58,685 $43,926 ======= ======= ======= ======= ======= Non-GAAP net income per share: Basic $0.60 $0.41 $0.47 $1.01 $0.71 Diluted $0.58 $0.40 $0.45 $0.98 $0.68 Weighted average common shares outstanding: Basic 57,872 58,734 61,782 58,301 62,262 Diluted 59,660 60,709 63,857 60,182 64,341 Netflix, Inc. Consolidated Balance Sheets (unaudited) (in thousands, except share and par value data) As of ------ June 30, December 31, 2009 2008 ---- ---- Assets Current assets: Cash and cash equivalents $87,471 $139,881 Short-term investments 167,498 157,390 Prepaid expenses 11,430 8,122 Prepaid revenue sharing expenses 14,671 18,417 Current content library, net 33,519 18,691 Deferred tax assets 5,594 5,617 Other current assets 22,381 13,329 ------ ------ Total current assets 342,564 361,447 Content library, net 100,316 98,547 Property and equipment, net 120,346 124,948 Deferred tax assets 17,225 22,409 Other assets 11,542 10,595 ------ ------ Total assets $591,993 $617,946 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $101,634 $100,344 Accrued expenses 27,782 31,394 Current portion of lease financing obligations 1,275 1,152 Deferred revenue 80,495 83,127 ------ ------ Total current liabilities 211,186 216,017 Lease financing obligations, excluding current portion 37,301 37,988 Other liabilities 19,135 16,786 ------ ------ Total liabilities 267,622 270,791 Stockholders' equity: Common stock, $0.001 par value; 160,000,000 shares authorized at June 30, 2009 and December 31, 2008; 57,415,726 and 58,862,478 issued and outstanding at June 30, 2009 and December 31, 2008, respectively 64 62 Additional paid-in capital 375,574 338,577 Treasury stock at cost (6,295,073 and 3,491,084 shares at June 30, 2009 and December 31, 2008, respectively) (215,250) (100,020) Accumulated other comprehensive income 725 84 Retained earnings 163,258 108,452 ------- ------- Total stockholders' equity 324,371 347,155 ------- ------- Total liabilities and stockholders' equity $591,993 $617,946 ======== ======== 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, 2009 2009 2008 2009 2008 ---- ---- ---- ---- ---- Cash flows from operating activities: Net income $32,443 $22,363 $26,579 $54,806 $39,923 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment and intangibles 9,013 9,175 8,188 18,188 14,772 Amortization of content library 53,235 49,304 57,012 102,539 114,582 Amortization of discounts and premiums on investments 119 194 177 313 316 Stock-based compensation expense 3,278 3,132 2,905 6,410 6,035 Excess tax benefits from stock-based compensation (3,815) (3,684) (2,554) (7,499) (3,374) Loss on disposal of property and equipment 110 144 - 254 - Loss (gain) on sale of short-term investments 101 (572) 78 (471) (4,242) Gain on disposal of DVDs (506) (2,033) (4,059) (2,539) (6,651) Deferred taxes 5,404 (623) (2,502) 4,781 (3,361) Changes in operating assets and liabilities: Prepaid expenses and other current assets (8,845) (391) (10,947) (9,236) (8,197) Content library (9,343) (22,091) (7,982) (31,434) (31,394) Accounts payable (6,549) 8,572 7,092 2,023 15,772 Accrued expenses (234) 4,331 (14,551) 4,097 (6,724) Deferred revenue (128) (2,504) (489) (2,632) (3,779) Other assets and liabilities 1,019 316 8,433 1,335 7,764 ----- --- ----- ----- ----- Net cash provided by operating activities 75,302 65,633 67,380 140,935 131,442 ------ ------ ------ ------- ------- Cash flows from investing activities: Purchases of short-term investments (28,769) (52,384) (65,937) (81,153) (157,891) Proceeds from sale of short-term investments 7,832 36,933 21,017 44,765 195,436 Proceeds from maturities of short-term investments 26,175 1,330 665 27,505 1,565 Purchases of property and equipment (6,933) (6,572) (14,662) (13,505) (27,093) Acquisitions of intangible asset - (200) (1,000) (200) (1,000) Acquisitions of content library (43,224) (46,499) (44,410) (89,723) (95,726) Proceeds from sale of DVDs 1,159 2,726 5,379 3,885 9,886 Investment in business - - - - (6,000) Other assets 11 (2) 20 9 28 -- -- -- -- -- Net cash used in investing activities (43,749) (64,668) (98,928) (108,417) (80,795) ------- ------- ------- -------- ------- Cash flows from financing activities: Principal payments of lease financing obligations (295) (269) (230) (564) (352) Proceeds from issuance of common stock 9,778 13,589 4,524 23,367 13,066 Excess tax benefits from stock-based compensation 3,815 3,684 2,554 7,499 3,374 Repurchases of common stock (72,511) (42,719) - (115,230) (99,885) ------- ------- -- -------- ------- Net cash (used in) provided by financing activities (59,213) (25,715) 6,848 (84,928) (83,797) ------- ------- ----- ------- ------- Net decrease in cash and cash equivalents (27,660) (24,750) (24,700) (52,410) (33,150) Cash and cash equivalents, beginning of period 115,131 139,881 168,989 139,881 177,439 ------- ------- ------- ------- ------- Cash and cash equivalents, end of period $87,471 $115,131 $144,289 $87,471 $144,289 ======= ======== ======== ======= ======== Non-GAAP free cash flow reconciliation: Net cash provided by operating activities $75,302 $65,633 $67,380 $140,935 $131,442 Purchases of property and equipment (6,933) (6,572) (14,662) (13,505) (27,093) Acquisitions of intangible asset - (200) (1,000) (200) (1,000) Acquisitions of content library (43,224) (46,499) (44,410) (89,723) (95,726) Proceeds from sale of DVDs 1,159 2,726 5,379 3,885 9,886 Other assets 11 (2) 20 9 28 -- -- -- -- -- Non-GAAP free cash flow $26,315 $15,086 $12,707 $41,401 $17,537 ======= ======= ======= ======= ======= Netflix, Inc. Consolidated Other Data (unaudited) (in thousands, except percentages, average monthly revenue per paying subscriber, average monthly gross profit per paying subscriber and subscriber acquisition cost) As of / Three Months Ended -------------------------- June 30, March 31, June 30, 2009 2009 2008 ---- ---- ---- Subscriber information: Subscribers: beginning of period 10,310 9,390 8,243 Gross subscriber additions: during period 1,936 2,413 1,384 Gross subscriber additions year-to-year change 39.9% 29.6% 34.6% Gross subscriber additions quarter-to- quarter sequential change (19.8%) 15.7% (25.7%) Less subscriber cancellations: during period (1,647) (1,493) (1,216) Subscribers: end of period 10,599 10,310 8,411 Subscribers year-to-year change 26.0% 25.1% 24.8% Subscribers quarter-to- quarter sequential change 2.8% 9.8% 2.0% Free subscribers: end of period 224 194 176 Free subscribers as percentage of ending subscribers 2.1% 1.9% 2.1% Paid subscribers: end of period 10,375 10,116 8,235 Paid subscribers year-to- year change 26.0% 24.9% 24.6% Paid subscribers quarter- to-quarter sequential change 2.6% 10.4% 1.6% Average monthly revenue per paying subscriber $13.29 $13.63 $13.78 Average monthly gross profit per paying subscriber $4.53 $4.66 $4.39 Churn 4.5% 4.2% 4.2% Subscriber acquisition cost $23.88 $25.79 $28.89 Margins: Gross margin 34.1% 34.2% 31.8% Operating margin 12.9% 9.3% 10.1% Net margin 7.9% 5.7% 7.9% Expenses as percentage of revenues: Technology and development 6.6% 6.1% 6.6% Marketing 11.3% 15.8% 11.8% General and administrative 3.2% 3.3% 4.0% Gain on disposal of DVDs 0.0% (0.2%) (0.7%) --- ---- ---- Total operating expenses 21.1% 25.0% 21.7% Year-to-year change: Total revenues 21.0% 20.8% 11.2% Subscription 16.0% 15.0% 16.1% Fulfillment expenses 22.2% 23.3% 21.6% Technology and development 22.2% 19.4% 18.0% Marketing 15.6% 13.4% (11.6%) General and administrative (1.2%) (5.3%) (2.9%) Gain on disposal of DVDs (94.8%) 31.7% (0.8%) Total operating expenses 17.9% 11.7% 6.9%
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/
Profile: International Entertainment
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