Netflix Announces Q4 2005 Financial Results

Netflix Announces Q4 2005 Financial Results

- Subscribers - 4.2 million

- Churn - 4.0 percent

- GAAP Net Income - $ 38.1 million

- Income Before Income Taxes - $9.1 million

LOS GATOS, Calif., Jan. 24 /PRNewswire-FirstCall/ -- Netflix (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2005.

For the fourth quarter:

-- Subscribers increased 60 percent year-over-year to 4.2 million. Net
subscriber additions were a record high for both the quarter and the
year.
-- Churn declined to a record low of 4.0 percent.
-- Revenue was $195 million.
-- GAAP net income was $38.1 million, which includes the benefit of
realized deferred tax assets of $30.2 million.
-- Income before income taxes was $9.1 million.
-- Non-GAAP net income was $41.4 million. Non-GAAP net income before
realized deferred tax assets was $11.3 million.

"2005 was another year of solid achievement and continued momentum," said Reed Hastings, Netflix co-founder and chief executive officer. "We generated rapid subscriber growth, made the best customer experience even better, ended the year with the lowest churn in our history, and delivered both rapid growth and strong earnings.

"We enter 2006 confident we can reach our goal of 20 million subscribers within the 2010 to 2012 time frame while delivering $50 million to $60 million in pretax income this year and 50 percent year-over-year earnings growth for the next three to four years after that."

Fourth-Quarter and Fiscal-Year 2005 Financial Highlights

Revenue for the fourth quarter of 2005 was a record $195.0 million, representing 36 percent year-over-year growth from $143.9 million for the fourth quarter of 2004, and 12 percent quarter-over-quarter growth from $174.3 million for the third quarter of 2005. Revenue for fiscal 2005 was $688.0 million, up 36 percent from $506.2 million for fiscal 2004.

GAAP net income for the fourth quarter of 2005 was $38.1 million, or $0.57 per diluted share, compared to GAAP net income of $5.6 million, or $0.09 per diluted share, for the fourth quarter of 2004 and GAAP net income of $6.9 million, or $0.11 per diluted share, for the third quarter of 2005.

GAAP net income for the fourth quarter included a benefit of the realized deferred tax assets of $30.2 million, or approximately $0.45 per diluted share, related to the recognition of the Company's deferred tax assets. The Company had previously discussed its expectation to realize these deferred tax assets in the near future. The Company has concluded, pursuant to Statement of Financial Accounting Standards No. 109, that the deferred tax assets are more likely than not to be realized.

GAAP net income for fiscal 2005 was $41.9 million, or $0.64 per diluted share, compared to GAAP net income of $21.6 million, or $0.33 per diluted share, for fiscal 2004.

GAAP net income for fiscal 2005 included a benefit of the realized deferred tax assets of $30.2 million, or approximately $0.46 per diluted share, related to the recognition of the Company's deferred tax assets.

Non-GAAP net income was $41.4 million, or $0.62 per diluted share, for the fourth quarter of 2005, compared to non-GAAP net income of $9.9 million, or $0.16 per diluted share, for the fourth quarter of 2004 and non-GAAP net income of $10.2 million, or $0.16 per diluted share, for the third quarter of 2005. Excluding the benefit of the realized deferred tax assets in the quarter, non-GAAP net income was $11.3 million, or $0.17 per diluted share.

Non-GAAP net income was $56.3 million, or $0.86 per diluted share, for fiscal 2005 compared to non-GAAP net income of $38.2 million, or $0.59 per diluted share for fiscal 2004. Excluding the benefit of the realized deferred tax assets, non-GAAP net income for fiscal 2005 was $26.1 million, or $0.40 per diluted share.

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

Gross margin for the fourth quarter of 2005 was 47.1 percent, compared to 45.5 percent for the fourth quarter of 2004 and 43.2 percent for the third quarter of 2005.

Free cash flow(1) for the fourth quarter of 2005 was $24.3 million, compared to $5.4 million in the fourth quarter of 2004 and $7.0 million for the third quarter of 2005. Free cash flow for fiscal 2005 was $24.3 million as compared to $34.8 million in fiscal 2004.

Cash provided by operating activities for the fourth quarter of 2005 was $63.7 million, compared to $32.5 million for the fourth quarter of 2004 and $33.3 million for the third quarter of 2005. Cash provided by operating activities for fiscal 2005 was $163.0 million, compared to $147.6 million for fiscal 2004.

Subscriber acquisition cost(2) for the fourth quarter of 2005 was $40.65 per gross subscriber addition, compared to $34.64(3) for the same period of 2004 and $35.69 for the third quarter of 2005. SAC for fiscal 2005 was $38.08 per gross subscriber addition compared to $35.39(4) for fiscal 2004.

Churn(5) for the fourth quarter of 2005 was 4.0 percent, compared to 4.4 percent for the fourth quarter of 2004 and 4.3 percent for the third quarter of 2005. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Subscribers. Netflix ended the fourth quarter of 2005 with approximately 4,179,000 total subscribers, representing 60 percent year-over-year growth from 2,610,000 total subscribers at the end of the fourth quarter of 2004 and 16 percent sequential growth from 3,592,000 subscribers at the end of the third quarter of 2005. Net subscriber additions in the quarter were 587,000, compared to 381,000 for the same period of 2004 and 396,000 for the third quarter of 2005.

During the quarter Netflix acquired 1,156,000 gross subscriber additions, representing 48 percent year-over-year growth from 783,000 gross subscriber additions acquired in the fourth quarter of 2004 and 26 percent quarter-over- quarter growth from 921,000 gross subscriber additions acquired in the third quarter of 2005.

Of the 4,179,000 total subscribers at quarter end, 96 percent, or 4,026,000, were paid subscribers. The other 4 percent, or 153,000, were free subscribers. Paid subscribers represented 95 percent of total subscribers at the end of the fourth quarter of 2004 and the third quarter of 2005.

Business Outlook

The Company's performance expectations for the first quarter of 2006 and full-year 2006 are as follows:

First-Quarter 2006

-- Ending subscribers of 4.6 million to 4.85 million
-- Revenue of $219 million to $224 million
-- GAAP net income (loss) of ($1.5) million to $2.5 million

Full-Year 2006

-- Ending subscribers of at least 5.9 million, up from at least
5.65 million
-- Revenue of at least $960 million, up from at least $940 million
-- Pretax income of $50 million to $60 million(6)
-- GAAP net income of $29.5 million to $35.4 million

Float and Trading Plans

The Company estimates the public float at approximately 46,802,948 shares as of December 31, 2005, down slightly from 46,874,645 shares as of September 30, 2005, based on registered shares held in street name with the Depository Trust and Clearing Corporation. No outstanding shares are subject to a lock-up agreement of any kind. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All open market sales are made pursuant to the terms of 10b5-1 Trading Plans approved by the Company and generally adopted no less than three months prior to the first date of sale under such plan.

Earnings Call

The Netflix earnings call will be webcast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed at http://ir.netflix.com/ . Following the conclusion of the webcast, a replay of the call will be available via Netflix's website at http://ir.netflix.com/ . For those without access to the Internet, a replay of the call will be available from approximately 5:00 p.m. Pacific Time on January 24, 2006 through January 30, 2006. To listen to a replay, call 719-457-0820, access code 7417955.

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, and, where specified, excludes the benefit of the realized tax assets. In addition, management believes that free cash flow is a useful measure of liquidity because it excludes the non-operational cash flows from purchases and sales of short-term investments and cash flows from financing activities. However, these non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net income and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. A reconciliation to the GAAP equivalents of these non-GAAP measures is contained in tabular form on the attached unaudited financial statements.

About Netflix

Netflix is the world's largest online movie rental service, providing more than four million subscribers access to over 55,000 DVD titles. Under the company's most popular program, for $17.99 a month, Netflix subscribers rent as many DVDs as they want and keep them as long as they want, with three movies out at a time. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by the USPS from regional shipping centers located throughout the United States. Netflix can reach more than 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than 1 billion movie ratings. Netflix also allows members to share and recommend movies to one another through its FriendsSM feature. For more information, visit 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 and GAAP net income for the first quarter of 2006 as well as subscriber growth, revenue, pre-tax income and GAAP net income for the full-year 2006. 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: impacts arising out of competition, our ability to manage our growth, in particular, managing our subscriber acquisition cost as well as the mix between revenue sharing titles and titles not subject to revenue sharing that are delivered to our subscribers; our ability to attract new subscribers and retain existing subscribers; changes in pricing, availability and effectiveness related to our advertising; fluctuations in consumer usage of our service, 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; 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; 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 March 15, 2005. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

(1) Free cash flow is defined as cash provided by operating activities
less cash used in investing activities excluding purchases and sales of
short-term investments.
(2) Subscriber acquisition cost is defined as the total marketing expense
on the Company's Statement of Operations divided by total gross
subscriber additions during the quarter.
(3) SAC in the fourth quarter of 2004 excludes costs associated with
international operations. Consolidated SAC was $36.18 for the fourth
quarter of 2004.
(4) SAC for fiscal 2004 excludes costs associated with international
operations. Consolidated SAC was $36.09 for the fiscal 2004.
(5) Churn is defined as customer cancellations in the quarter divided by
the sum of beginning subscribers and gross subscriber additions, divided
by three months.
(6) Pretax income is defined as income before income taxes as shown on
the Company's Statement of Operations, which line item includes stock
based compensation expense.

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

Three Months Ended Twelve Months Ended
Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
2004 2005 2005 2004 2005
Revenues:
Subscription $140,664 $172,740 $192,566 $500,611 $681,779
Sales 3,229 1,577 2,474 5,617 6,215
Total revenues 143,893 174,317 195,040 506,228 687,994
Cost of revenues:
Subscription 76,223 97,878 101,967 273,401 393,788
Sales 2,219 1,189 1,252 3,057 3,794
Total cost of
revenues 78,442 99,067 103,219 276,458 397,582
Gross profit 65,451 75,250 91,821 229,770 290,412
Operating expenses:
Fulfillment 16,433 17,544 18,964 56,609 70,762
Technology and
development 5,890 8,006 8,268 22,906 30,942
Marketing 28,332 32,867 46,989 98,027 141,997
General and
administrative 5,749 8,020 6,815 16,287 24,740
Stock-based
compensation 4,358 3,293 3,332 16,587 14,327
Total operating
expenses 60,762 69,730 84,368 210,416 282,768
Operating income 4,689 5,520 7,453 19,354 7,644
Other income (expense):
Interest and other
income 1,118 1,491 1,965 2,592 5,753
Interest and other
expense (57) (13) (353) (170) (407)
Income before income
taxes 5,750 6,998 9,065 21,776 12,990
Provision for (benefit
from) income taxes 181 52 (29,049) 181 (28,940)
Net income $5,569 $6,946 $38,114 $21,595 $41,930
Net income per share:
Basic $.11 $.13 $.70 $.42 $.78
Diluted $.09 $.11 $.57 $.33 $.64
Weighted average common
shares outstanding:
Basic 52,553 53,693 54,393 51,988 53,528
Diluted 63,702 66,012 66,962 64,713 65,518

Reconciliation of Non-
GAAP Financial Measures
(Unaudited)
Non-GAAP net income
reconciliation:
Net income $5,569 $6,946 $38,114 $21,595 $41,930
Add back:
Stock-based
compensation 4,358 3,293 3,332 16,587 14,327
Non-GAAP net income $9,927 $10,239 $41,446 $38,182 $56,257
Non-GAAP net income
per share:
Basic $.19 $.19 $.76 $.73 $1.05
Diluted $.16 $.16 $.62 $.59 $.86
Weighted average common
shares outstanding:
Basic 52,553 53,693 54,393 51,988 53,528
Diluted 63,702 66,012 66,962 64,713 65,518

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

As of
December 31, December 31,
2004 2005
Assets
Current assets:
Cash and cash equivalents $174,461 $212,256
Prepaid expenses 2,741 7,848
Prepaid revenue sharing expenses 4,695 5,252
Deferred tax assets -- 9,588
Other current assets 5,449 4,669
Total current assets 187,346 239,613
DVD library, net 42,158 57,032
Intangible assets, net 961 457
Property and equipment, net 18,728 40,213
Deposits 1,600 1,249
Deferred tax assets -- 20,565
Other assets 1,000 800
Total assets $251,793 $359,929

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $49,775 $63,491
Accrued expenses 13,131 20,908
Deferred revenue 31,936 48,533
Current portion of capital lease obligations 68 --
Total current liabilities 94,910 132,932
Deferred rent 600 842
Total liabilities 95,510 133,774
Stockholders' equity:
Common stock, $0.001 par value; 160,000,000
shares authorized at December 31, 2004 and
December 31, 2005; 52,732,025 and 54,755,731
issued and outstanding at December 31, 2004
and December 31, 2005, respectively 53 55
Additional paid-in capital 292,843 317,194
Deferred stock-based compensation (4,693) (1,326)
Accumulated other comprehensive loss (222) --
Accumulated deficit (131,698) (89,768)
Total stockholders' equity 156,283 226,155
Total liabilities and stockholders' equity $251,793 $359,929

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

Three Months Ended Twelve Months Ended
Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
2004 2005 2005 2004 2005
Cash flows from
operating activities:
Net income $5,569 $6,946 $38,114 $21,595 $41,930
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation of
property and
equipment 1,727 2,424 2,616 5,871 9,134
Amortization of DVD
library 20,628 24,477 24,848 80,346 96,883
Amortization of
intangible assets 454 139 12 1,987 985
Stock-based
compensation expense 4,358 3,293 3,332 16,587 14,327
Stock option income
tax benefits 176 12 (12) 176 --
Loss on disposal of
property and equipment 135 -- -- 135 --
Loss on disposal of
short-term investments -- -- -- 274 --
Gain on disposal of
DVDs (1,180) (819) (1,432) (2,912) (3,588)
Non-cash interest
expense 11 -- -- 44 11
Deferred taxes -- -- (30,153) -- (30,153)
Changes in operating
assets and liabilities:
Prepaid expenses and
other current assets (4,130) 1,401 (7,737) (9,130) (4,884)
Accounts payable 2,107 (12,260) 19,540 17,121 13,716
Accrued expenses (2,709) 6,702 504 1,506 7,777
Deferred revenue 5,278 903 14,133 13,612 16,597
Deferred rent 113 90 (33) 359 242
Net cash provided
by operating
activities 32,537 33,308 63,732 147,571 162,977
Cash flows from investing
activities:
Purchases of short-term
investments -- -- -- (586) --
Proceeds from sale of
short-term investments -- -- -- 45,013 --
Purchases of property
and equipment (6,941) (5,429) (12,414) (14,962) (30,619)
Acquisition of intangible
asset -- (481) -- -- (481)
Acquisitions of DVD
library (23,332) (21,939) (29,753) (102,971)(113,950)
Proceeds from sale of
DVDs 3,229 1,577 2,040 5,617 5,781
Deposits and other
assets (99) (10) 716 (492) 551
Net cash used in
investing activities (27,143) (26,282) (39,411) (68,381)(138,718)
Cash flows from financing
activities:
Proceeds from issuance
of common stock 1,538 3,888 5,827 6,035 13,393
Principal payments on
notes payable and
capital lease
obligations (107) -- -- (436) (79)
Net cash provided by
financing activities 1,431 3,888 5,827 5,599 13,314
Effect of exchange rate
changes on cash and cash
equivalents (178) -- 222 (222) 222
Net increase in cash and
cash equivalents 6,647 10,914 30,370 84,567 37,795
Cash and cash equivalents,
beginning of period 167,814 170,972 181,886 89,894 174,461
Cash and cash
equivalents, end of
period $174,461 $181,886 $212,256 $174,461 $212,256

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $32,537 $33,308 $63,732 $147,571 $162,977
Purchases of property
and equipment (6,941) (5,429) (12,414) (14,962) (30,619)
Acquisition of
intangible asset -- (481) -- -- (481)
Acquisitions of DVD
library (23,332) (21,939) (29,753) (102,971)(113,950)
Proceeds from sale
of DVDs 3,229 1,577 2,040 5,617 5,781
Deposits and other
assets (99) (10) 716 (492) 551
Non-GAAP free cash flow $5,394 $7,026 $24,321 $34,763 $24,259

Netflix, Inc.
Consolidated Other data
(unaudited)
(in thousands, except percentages and subscriber acquisition cost)

As of/Three Months Ended As of/Twelve Months Ended
Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
2004 2005 2005 2004 2005

Subscriber information:
Subscribers:
beginning of
period 2,229 3,196 3,592 1,487 2,610
Gross subscribers
additions: during
period 783 921 1,156 2,716 3,729
Gross subscriber
additions year-
to-year change 76.4% 56.1% 47.6% 72.9% 37.3%
Gross subscriber
additions
quarter-to-
quarter
sequential
change 32.7% 30.3% 25.5% -- --
Less subscriber
cancellations:
during period (402) (525) (569) (1,593) (2,160)
Subscribers: end
of period 2,610 3,592 4,179 2,610 4,179
Subscribers year-
to-year change 75.5% 61.1% 60.1% 75.5% 60.1%
Subscribers
quarter-to-quarter
sequential change 17.1% 12.4% 16.3% -- --
Free subscribers:
end of period 124 169 153 124 153
Free subscribers
as percentage of
ending subscribers 4.8% 4.7% 3.7% 4.8% 3.7%
Paid subscribers: end
of period 2,486 3,423 4,026 2,486 4,026
Paid subscribers
year-to-year
change 75.6% 60.3% 61.9% 75.6% 61.9%
Paid subscribers
quarter-to-quarter
sequential change 16.4% 10.1% 17.6% -- --
Churn 4.4% 4.3% 4.0% -- --
Subscriber acquisition
cost - Consolidated $36.18 $35.69 $40.65 $36.09 $38.08
Subscriber
acquisition cost
- U.S. $34.64 $35.69 $40.65 $35.39 $38.08
Margins:
Gross margin 45.5% 43.2% 47.1% 45.4% 42.2%
Operating margin 3.3% 3.2% 3.8% 3.8% 1.1%
Net margin 3.9% 4.0% 19.5% 4.3% 6.1%
Expenses as percentage
of revenues:
Fulfillment 11.4% 10.1% 9.7% 11.2% 10.3%
Technology and
development 4.1% 4.6% 4.2% 4.5% 4.5%
Marketing 19.7% 18.9% 24.1% 19.4% 20.6%
General and
administrative 4.0% 4.6% 3.5% 3.2% 3.6%
Operating
expenses before
stock-based
compensation 39.2% 38.2% 41.5% 38.3% 39.0%
Stock-based
compensation 3.0% 1.8% 1.8% 3.3% 2.1%
Total operating
expenses 42.2% 40.0% 43.3% 41.6% 41.1%
Year-to-year change:
Total revenues 77.2% 23.1% 35.5% 85.9% 35.9%
Fulfillment 75.8% 16.9% 15.4% 81.0% 25.0%
Technology and
development 21.7% 26.6% 40.4% 28.1% 35.1%
Marketing 94.0% 45.9% 65.9% 96.3% 44.9%
General and
administrative 124.0% 94.6% 18.5% 69.9% 51.9%
Operating
expenses
before
stock-based
compensation 79.9% 38.5% 43.7% 78.3% 38.5%
Stock-based
compensation 13.7% (10.0%) (23.5%) 54.7% (13.6%)
Total operating
expenses 72.7% 35.0% 38.8% 76.2% 34.4%

Source: Netflix, Inc.

CONTACT: investors, Deborah Crawford, Director, Investor Relations,
+1-408-540-3712, or media, Ken Ross, VP, Corporate Communications,
+1-408-540-3931, both of Netflix

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

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