Netflix Announces Q2 2010 Financial Results

Netflix Announces Q2 2010 Financial Results

Subscribers - 15.0 million Revenue - $519.8 million GAAP Net Income - $43.5 million GAAP EPS - $0.80 per diluted share

LOS GATOS, Calif., July 21 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2010.

"Our rate of subscriber growth continues to accelerate and we added more than a million net new subscribers for the third consecutive quarter," said Netflix Co-Founder and CEO Reed Hastings. "Consumers are clearly enthralled by our offering of unlimited movies and TV shows streamed over the Internet."

Second-Quarter 2010 Financial Highlights

Subscribers. Netflix ended the second quarter of 2010 with approximately 15,001,000 total subscribers, representing 42 percent year-over-year growth from 10,599,000 total subscribers at the end of the second quarter of 2009 and 7 percent sequential growth from 13,967,000 subscribers at the end of the first quarter of 2010.

Net subscriber change in the quarter was an increase of 1,034,000 compared to an increase of 289,000 for the same period of 2009 and an increase of 1,699,000 for the first quarter of 2010.

Gross subscriber additions for the quarter totaled 3,059,000, representing 58 percent year-over-year growth from 1,936,000 gross subscriber additions in the second quarter of 2009 and 12 percent quarter-over-quarter decline from 3,492,000 gross subscriber additions in the first quarter of 2010.

Of the 15,001,000 total subscribers at quarter end, 97 percent, or 14,577,000, were paid subscribers. The other 3 percent, or 424,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2009 and at the end of the first quarter of 2010.

Revenue for the second quarter of 2010 was $519.8 million, representing 27 percent year-over-year growth from $408.5 million for the second quarter of 2009, and 5 percent sequential growth from $493.7 million for the first quarter of 2010.

Gross margin(1) for the second quarter of 2010 was 39.4 percent compared to 34.1 percent for the second quarter of 2009 and 37.8 percent for the first quarter of 2010.

GAAP net income for the second quarter of 2010 was $43.5 million, or $0.80 per diluted share compared to GAAP net income of $32.4 million, or $0.54 per diluted share, for the second quarter of 2009 and GAAP net income of $32.3 million, or $0.59 per diluted share, for the first quarter of 2010. GAAP net income grew 34 percent on a year-over-year basis and GAAP EPS grew 48 percent on a year-over-year basis.

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the second quarter of 2010 was 61 percent compared to 37 percent for the same period of 2009 and 55 percent for the first quarter of 2010.

Subscriber acquisition cost(2) for the second quarter of 2010 was $24.37 per gross subscriber addition compared to $23.88 for the same period of 2009 and $21.54 for the first quarter of 2010.

Churn(3) for the second quarter of 2010 was 4.0 percent compared to 4.5 percent for the second quarter of 2009 and 3.8 percent for the first quarter of 2010. 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 2010 was $34.2 million compared to $26.3 million for the second quarter of 2009 and $37.6 million for the first quarter of 2010.

Last twelve-month free cash flow for the second quarter of 2010 was $127.5 million compared to $118.6 million for the second quarter of 2009 and $119.6 million for the first quarter of 2010.

Cash provided by operating activities for the second quarter of 2010 was $60.3 million compared to $75.3 million for the second quarter of 2009 and $77.2 million for the first quarter of 2010.

Business Outlook

The Company's performance expectations for the third and fourth quarters of 2010 and full-year 2010 are as follows:

Third-Quarter 2010
-- Ending subscribers of 16.3 million to 16.7 million
-- Revenue of $546 million to $554 million
-- GAAP net income of $33 million to $40 million
-- GAAP EPS of $0.61 to $0.74 per diluted share

Fourth-Quarter 2010
-- Ending subscribers of 17.7 million to 18.5 million
-- Revenue of $580 million to $596 million
-- GAAP net income of $32 million to $40 million
-- GAAP EPS of $0.58 to $0.73 per diluted share

Full-Year 2010
-- Ending subscribers of 17.7 million to 18.5 million, up from 16.5
million to 17.3 million
-- Revenue of $2.14 billion to $2.16 billion, up from $2.11 billion to
$2.16 billion
-- GAAP net income of $141 million to $156 million, up from $132 million
to $144 million
-- GAAP EPS of $2.58 to $2.86 per diluted share, up from $2.41 to $2.63
per diluted share

Earnings Q&A Session

In conjunction with this earnings press release, the Company has posted management's commentary to its Web site at http://ir.netflix.com/. Netflix management will host a live Q&A session at 3:00 p.m. Pacific Time to discuss the Company's financial results and business outlook, with questions submitted via email. Please email your questions to ir@netflix.com. (Please note this new email address). The company will read the questions aloud on the call and respond to as many questions as possible.

All media inquiries should be directed to Steve Swasey at (408) 540-3947or sswasey@netflix.com.

A live webcast and the replay of the earnings Q&A session can be accessed on the investor relations section of the Netflix website at http://ir.netflix.com/. For those without access to the Internet, a replay of the call will be available from 6:00 p.m. Pacific Time on July 21, 2010 through midnight on July 24, 2010. To listen to the replay, call (706) 645-9291, conference ID 84659036.

Use of Non-GAAP Measures

This press release and its attachments include reference to non-GAAP financial measures of free cash flow and non-GAAP net income. 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

With more than 15 million members, Netflix, Inc. (NASDAQ:NFLX) is the world's largest subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail. For $8.99 a month, Netflix members can instantly watch unlimited TV episodes and movies streamed to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes. With Netflix, there are never any due dates or late fees. Members can select from a growing library of titles that can be watched instantly and a vast array of titles on DVD. Among the large and expanding base of devices that can stream movies and TV episodes from Netflix right to members' TVs are Microsoft's Xbox 360 and Sony's PS3 game consoles and Nintendo's Wii console; Blu-ray disc players from Samsung, LG and Insignia; Internet TVs from LG, Sony and VIZIO; the Roku digital video player and TiVo digital video recorders; and Apple's iPad tablet. 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 2010 and the full-year 2010. 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; 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; maintenance and expansion of device platforms for instant streaming; continued weakness in 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 22, 2010. 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 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 Condensed Consolidated Statements of Operations divided by total gross subscriber additions during the quarter.

(3) Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then 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.

Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

Three Months Ended
------------------
June June
30, March 31, 30,
2010 2010 2009
---- ---- ----

Revenues $519,819 $493,665 $408,509
Cost of revenues:
Subscription 265,387 259,560 227,316
Fulfillment expenses * 49,547 47,602 41,927
------ ------ ------
Total cost of revenues 314,934 307,162 269,243
------- ------- -------
Gross profit 204,885 186,503 139,266
Operating expenses:
Technology and development * 37,863 37,399 27,119
Marketing * 74,533 75,219 46,231
General and administrative * 17,119 17,193 13,252
Gain on disposal of DVDs (1,972) (1,653) (118)
------ ------ ----
Total operating expenses 127,543 128,158 86,484
------- ------- ------
Operating income 77,342 58,345 52,782
Other income (expense):
Interest expense (4,893) (4,959) (674)
Interest and other income 921 972 866
--- --- ---
Income before income taxes 73,370 54,358 52,974
Provision for income taxes 29,851 22,086 20,531
------ ------ ------
Net income $43,519 $32,272 $32,443
======= ======= =======
Net income per share:
Basic $0.83 $0.61 $0.56
Diluted $0.80 $0.59 $0.54
Weighted average common shares
outstanding:
Basic 52,486 52,911 57,872
Diluted 54,324 54,775 59,660

*Stock-based compensation included in
expense line items:
Fulfillment expenses $307 $176 $102
Technology and development 2,376 1,869 1,190
Marketing 756 643 458
General and administrative 3,489 2,814 1,528

Reconciliation of Non-GAAP Financial
Measures
(unaudited)
Non-GAAP net income reconciliation:
GAAP net income $43,519 $32,272 $32,443
Stock-based compensation 6,928 5,502 3,278
Income tax effect of stock-based
compensation (2,820) (2,234) (1,272)
------ ------ ------
Non-GAAP net income $47,627 $35,540 $34,449
======= ======= =======
Non-GAAP net income per share:
Basic $0.91 $0.67 $0.60
Diluted $0.88 $0.65 $0.58
Weighted average common shares
outstanding:
Basic 52,486 52,911 57,872
Diluted 54,324 54,775 59,660

Six Months Ended
----------------
June
June 30, 30,
2010 2009
---- ----

Revenues $1,013,484 $802,607
Cost of revenues:
Subscription 524,947 444,772
Fulfillment expenses * 97,149 83,739
------ ------
Total cost of revenues 622,096 528,511
------- -------
Gross profit 391,388 274,096
Operating expenses:
Technology and development * 75,262 51,319
Marketing * 149,752 108,473
General and administrative * 34,312 26,266
Gain on disposal of DVDs (3,625) (1,215)
------ ------
Total operating expenses 255,701 184,843
------- -------
Operating income 135,687 89,253
Other income (expense):
Interest expense (9,852) (1,344)
Interest and other income 1,893 2,476
----- -----
Income before income taxes 127,728 90,385
Provision for income taxes 51,937 35,579
------ ------
Net income $75,791 $54,806
======= =======
Net income per share:
Basic $1.44 $0.94
Diluted $1.39 $0.91
Weighted average common shares
outstanding:
Basic 52,697 58,301
Diluted 54,548 60,182

*Stock-based compensation included in
expense line items:
Fulfillment expenses $483 $222
Technology and development 4,245 2,261
Marketing 1,399 901
General and administrative 6,303 3,026

Reconciliation of Non-GAAP Financial
Measures
(unaudited)
Non-GAAP net income reconciliation:
GAAP net income $75,791 $54,806
Stock-based compensation 12,430 6,410
Income tax effect of stock-based
compensation (5,054) (2,531)
------ ------
Non-GAAP net income $83,167 $58,685
======= =======
Non-GAAP net income per share:
Basic $1.58 $1.01
Diluted $1.52 $0.98
Weighted average common shares
outstanding:
Basic 52,697 58,301
Diluted 54,548 60,182

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)

As of
-----
June 30, December 31,
2010 2009
---- ----
Assets
Current assets:
Cash and cash equivalents $107,327 $134,224
Short-term investments 171,758 186,018
Current content library,
net 93,123 37,329
Prepaid content 33,837 26,741
Other current assets 35,173 26,701
------ ------
Total current assets 441,218 411,013
Content library, net 94,666 108,810
Property and equipment,
net 123,292 131,653
Deferred tax assets 21,951 15,958
Other non-current assets 12,845 12,300
------ ------
Total assets $693,972 $679,734
======== ========
Liabilities and
Stockholders' Equity
Current liabilities:
Accounts payable $120,031 $91,475
Accrued expenses 34,746 33,387
Current portion of lease
financing obligations 1,971 1,410
Deferred revenue 101,419 100,097
------- -------
Total current liabilities 258,167 226,369
Long-term debt 200,000 200,000
Lease financing
obligations, excluding
current portion 35,185 36,572
Other non-current
liabilities 23,980 17,650
------ ------
Total liabilities 517,332 480,591
Stockholders' equity:
Common stock, $0.001 par
value; 160,000,000 shares
authorized at June 30,
2010 and December 31,
2009; 52,358,171 and
53,440,073 issued and
outstanding at June 30,
2010 and December 31,
2009, respectively 52 53
Accumulated other
comprehensive income, net 802 273
Retained earnings 175,786 198,817
------- -------
Total stockholders' equity 176,640 199,143
-------
Total liabilities and stockholders'
equity $693,972 $679,734
======== ========

Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

Three Months Ended
------------------
June 30, March 31, June 30,
2010 2010* 2009
---- ----- ----
Cash flows from operating
activities:
Net income $43,519 $32,272 $32,443
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Acquisition of streaming
content library (66,157) (50,475) (9,343)
Amortization of content
library 65,143 62,292 53,235
Depreciation and
amortization of property,
equipment and intangibles 9,309 10,859 9,013
Amortization of discounts
and premiums on
investments 236 234 119
Amortization of debt
issuance costs 137 98 -
Stock-based compensation
expense 6,928 5,502 3,278
Excess tax benefits from
stock-based compensation (11,182) (7,424) (3,815)
Loss on disposal of
property and equipment - - 110
(Gain) loss on sale of
short-term investments (215) (264) 101
Gain on disposal of DVDs (3,058) (3,228) (506)
Deferred taxes (3,394) (2,761) 5,898
Changes in operating
assets and liabilities:
Prepaid content (2,133) (4,963) (1,613)
Other current assets (9,211) 548 (7,232)
Accounts payable 19,263 16,878 (6,549)
Accrued expenses 7,917 13,746 (34)
Deferred revenue 1,310 12 (128)
Other assets and
liabilities 1,840 3,879 325
----- ----- ---
Net cash provided by
operating activities 60,252 77,205 75,302
------ ------ ------
Cash flows from investing
activities:
Acquisitions of DVD
content library (24,191) (36,902) (43,224)
Purchases of short-term
investments (21,795) (35,995) (28,769)
Proceeds from sale of
short-term investments 32,055 30,770 7,832
Proceeds from maturities
of short-term
investments 4,310 4,013 26,175
Purchases of property and
equipment (5,671) (6,393) (6,933)
Acquisitions of intangible
assets - (130) -
Proceeds from sale of DVDs 3,815 3,984 1,159
Other assets 10 (172) 11
--- ---- ---
Net cash used in investing
activities (11,467) (40,825) (43,749)
------- ------- -------
Cash flows from financing
activities:
Principal payments of
lease financing
obligations (465) (361) (295)
Proceeds from issuance of
common stock 13,109 9,918 9,778
Excess tax benefits from
stock-based compensation 11,182 7,424 3,815
Repurchases of common
stock (45,145) (107,724) (72,511)
------- -------- -------
Net cash used in financing
activities (21,319) (90,743) (59,213)
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 27,466 (54,363) (27,660)
Cash and cash equivalents,
beginning of period 79,861 134,224 115,131
Cash and cash equivalents,
end of period $107,327 $79,861 $87,471
======== ======= =======

Six Months Ended
----------------
June 30, June 30,
2010 2009
---- ----
Cash flows from operating
activities:
Net income $75,791 $54,806
Adjustments to reconcile net income
to net cash
provided by operating activities:
Acquisition of streaming content
library (116,632) (31,434)
Amortization of content library 127,435 102,539
Depreciation and amortization of
property, equipment and intangibles 20,168 18,188
Amortization of discounts and
premiums on investments 470 313
Amortization of debt issuance costs 235 -
Stock-based compensation expense 12,430 6,410
Excess tax benefits from stock-
based compensation (18,606) (7,499)
Loss on disposal of property and
equipment - 254
(Gain) loss on sale of short-term
investments (479) (471)
Gain on disposal of DVDs (6,286) (2,539)
Deferred taxes (6,155) 4,554
Changes in operating assets and
liabilities:
Prepaid content (7,096) 2,485
Other current assets (8,663) (11,721)
Accounts payable 36,141 2,023
Accrued expenses 21,663 2,911
Deferred revenue 1,322 (2,632)
Other assets and liabilities 5,719 2,748
----- -----
Net cash provided by
operating activities 137,457 140,935
------- -------
Cash flows from investing
activities:
Acquisitions of DVD content library (61,093) (89,723)
Purchases of short-term investments (57,790) (81,153)
Proceeds from sale of short-term
investments 62,825 44,765
Proceeds from maturities of short-
term investments 8,323 27,505
Purchases of property and equipment (12,064) (13,505)
Acquisitions of intangible assets (130) (200)
Proceeds from sale of DVDs 7,799 3,885
Other assets (162) 9
---- ---
Net cash used in investing
activities (52,292) (108,417)
------- --------
Cash flows from financing
activities:
Principal payments of lease
financing obligations (826) (564)
Proceeds from issuance of common
stock 23,027 23,367
Excess tax benefits from stock-
based compensation 18,606 7,499
Repurchases of common stock (152,869) (115,230)
-------- --------
Net cash used in financing
activities (112,062) (84,928)
-------- -------
Net increase (decrease) in cash and
cash equivalents (26,897) (52,410)
Cash and cash equivalents, beginning
of period 134,224 139,881
Cash and cash equivalents, end of
period $107,327 $87,471
======== =======

Three Months Ended
------------------
June 30, March 31, June 30,
2010 2010 2009
---- ---- ----
Non-GAAP free cash flow reconciliation:
Net cash provided by operating
activities $60,252 $77,205 $75,302
Acquisitions of DVD content
library (24,191) (36,902) (43,224)
Purchases of property and
equipment (5,671) (6,393) (6,933)
Acquisitions of intangible assets - (130) -
Proceeds from sale of DVDs 3,815 3,984 1,159
Other assets 10 (172) 11
Non-GAAP free cash flow $34,215 $37,592 $26,315
======= ======= =======

* Certain prior period amounts have been reclassified.

Six Months Ended
----------------
June 30, June 30,
2010 2009
---- ----
Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities $137,457 $140,935
Acquisitions of DVD content library (61,093) (89,723)
Purchases of property and equipment (12,064) (13,505)
Acquisitions of intangible assets (130) (200)
Proceeds from sale of DVDs 7,799 3,885
Other assets (162) 9
Non-GAAP free cash flow $71,807 $41,401
======= =======

* Certain prior period amounts have been reclassified.

Twelve Months Ended
-------------------
June 30, March 31, June 30,
2010 2010 2009
---- ---- ----
Non-GAAP free cash flow
reconciliation:
Net cash provided by operating
activities $321,585 $336,635 $293,530
Acquisitions of DVD content
library (164,414) (183,447) (156,846)
Purchases of property and
equipment (44,491) (45,753) (30,202)
Acquisitions of intangible
assets (130) (130) (262)
Proceeds from sale of DVDs 15,078 12,422 12,367
Other assets (100) (99) (20)
Non-GAAP free cash flow $127,528 $119,628 $118,567
======== ======== ========

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,
2010 2010 2009
---- ---- ----
Subscriber information:
Subscribers: beginning of
period 13,967 12,268 10,310
Gross subscriber additions:
during period 3,059 3,492 1,936
Gross subscriber additions
year-to-year change 58.0% 44.7% 39.9%
Gross subscriber additions
quarter-to-quarter
sequential change (12.4%) 24.6% (19.8%)
Less subscriber
cancellations: during period (2,025) (1,793) (1,647)
Subscribers: end of period 15,001 13,967 10,599
Subscribers year-to-year
change 41.5% 35.5% 26.0%
Subscribers quarter-to-
quarter sequential change 7.4% 13.8% 2.8%
Free subscribers: end of
period 424 345 224
Free subscribers as
percentage of ending
subscribers 2.8% 2.5% 2.1%
Paid subscribers: end of
period 14,577 13,622 10,375
Paid subscribers year-to-
year change 40.5% 34.7% 26.0%
Paid subscribers quarter-to-
quarter sequential change 7.0% 14.5% 2.6%
Average monthly revenue per
paying subscriber $12.29 $12.90 $13.29
Average monthly gross profit
per paying subscriber $4.84 $4.87 $4.53
Percentage of subscribers who
watched instantly more than
15 minutes of a TV episode
or movie 61% 55% 37%
Household penetration -Bay
Area 26% 24% 21%
Household penetration -Rest
of Country 13% 12% 9%
Churn 4.0% 3.8% 4.5%
Subscriber acquisition cost $24.37 $21.54 $23.88
Margins:
Gross margin 39.4% 37.8% 34.1%
Operating margin 14.9% 11.8% 13.0%
Net margin 8.4% 6.5% 8.0%
Expenses as percentage of
revenues:
Technology and development 7.3% 7.6% 6.6%
Marketing 14.3% 15.2% 11.3%
General and administrative 3.3% 3.5% 3.2%
Gain on disposal of DVDs (0.4%) (0.3%) -
Total operating expenses 24.5% 26.0% 21.1%
Year-to-year change:
Total revenues 27.2% 25.3% 21.0%
Cost of subscription 16.7% 19.4% 17.3%
Fulfillment expenses 18.2% 13.8% 15.4%
Technology and development 39.6% 54.5% 22.2%
Marketing 61.2% 20.8% 15.6%
General and administrative 29.2% 32.1% (1.2%)
Gain on disposal of DVDs 1571.2% 50.7% (94.8%)
Total operating expenses 47.5% 30.3% 17.9%

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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