Netflix Announces Q4 2006 Financial Results

Netflix Announces Q4 2006 Financial Results

Subscribers - 6.3 million, up 51 percent year-over-year Revenue - $277.2 million, up 44 percent year-over-year GAAP Net Income - $14.9 million, down 61 percent year-over-year Income Before Income Taxes - $23.8 million, up 439 percent year-over-year

LOS GATOS, Calif., Jan. 24 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2006.

"2006 was a solid year for Netflix, demonstrating again the strength of our business model," said Reed Hastings, Netflix co-founder and chief executive officer. "Our accomplishments during the year -- strong subscriber growth, continued improvement in the customer experience, and increased profitability -- together with the recent launch of the first generation of our online video option, leave us better positioned than ever to achieve our long-term objective of being the movie rental leader."

Fourth-Quarter and Fiscal-Year 2006 Financial Highlights

Revenue(1) for the fourth quarter of 2006 was $277.2 million, representing 44 percent year-over-year growth from $193.0 million for the fourth quarter of 2005, and 8 percent sequential growth from $256.0 million for the third quarter of 2006. Revenue for fiscal 2006 was $996.7 million, up 46 percent from $682.2 million for fiscal 2005.

GAAP net income for the fourth quarter of 2006 was $14.9 million, or $0.21 per diluted share, compared to GAAP net income of $38.2 million, or $0.57 per diluted share, for the fourth quarter of 2005 and GAAP net income of $12.8 million, or $0.18 per diluted share, for the third quarter of 2006. GAAP net income for the fourth quarter of 2005 included a benefit of the realized deferred tax assets of $34.9 million, or approximately $0.52 per diluted share, related to the recognition of the Company's deferred tax assets.

GAAP net income for fiscal 2006 was $49.1 million, or $0.71 per diluted share, compared to GAAP net income of $42.0 million, or $0.64 per diluted share, for fiscal 2005.

Non-GAAP net income was $16.8 million, or $0.24 per diluted share, for the fourth quarter of 2006, compared to non-GAAP net income of $41.5 million, or $0.62 per diluted share, for the fourth quarter of 2005 and non-GAAP net income of $14.6 million, or $0.21 per diluted share, for the third quarter of 2006. Non-GAAP net income for the fourth quarter of 2005 included a benefit of the realized deferred tax assets of $34.9 million, or approximately $0.52 per diluted share, related to the recognition of the Company's deferred tax assets.

Non-GAAP net income was $56.8 million, or $0.82 per diluted share, for fiscal 2006 compared to non-GAAP net income of $56.4 million, or $0.86 per diluted share for fiscal 2005.

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

Gross margin(2) for the fourth quarter of 2006 was 38.9 percent, compared to 37.2 percent for the fourth quarter of 2005 and 38.0 percent for the third quarter of 2006. Gross margin for fiscal 2006 was 37.1 percent, compared to 31.7 percent for fiscal 2005.

Stock-based compensation. In accordance with SEC Staff Accounting Bulletin No. 107, stock-based compensation is no longer presented as a separate line item on our income statement. Stock-based compensation is now presented in the same lines as cash compensation paid to the same individuals. Stock-based compensation recognized in prior periods has been reclassified to conform with the presentation in the current period. In the fourth quarter, the charge related to stock-based compensation was $3.1 million, compared to $3.3 million in the fourth quarter of 2005 and compared to $3.2 million in the third quarter of 2006.

The charge related to stock-based compensation for fiscal 2006 was $12.7 million, compared to $14.3 million for fiscal 2005.

Free cash flow(3) for the fourth quarter of 2006 was $22.5 million, compared to $24.3 million in the fourth quarter of 2005 and $22.3 million for the third quarter of 2006. Free cash flow for fiscal 2006 was $62.0 million as compared to $24.3 million in fiscal 2005.

Cash provided by operating activities for the fourth quarter of 2006 was $87.1 million, compared to $59.1 million for the fourth quarter of 2005 and $61.5 million for the third quarter of 2006. Cash provided by operating activities for fiscal 2006 was $247.9 million, compared to $157.5 million for fiscal 2005.

Subscriber acquisition cost(4) for the fourth quarter of 2006 was $44.31 per gross subscriber addition, compared to $41.17 for the same period of 2005 and $45.32 for the third quarter of 2006. SAC for fiscal 2006 was $42.96 per gross subscriber addition compared to $38.77 for fiscal 2005.

Churn(5) for the fourth quarter of 2006 was 3.9 percent, compared to 4.0 percent for the fourth quarter of 2005 and 4.2 percent for the third quarter of 2006. 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 2006 with approximately 6,316,000 total subscribers, representing 51 percent year-over-year growth from 4,179,000 total subscribers at the end of the fourth quarter of 2005 and 12 percent sequential growth from 5,662,000 subscribers at the end of the third quarter of 2006.

Net subscriber additions in the quarter were 654,000, compared to 587,000 for the same period of 2005 and 493,000 for the third quarter of 2006.

During the quarter Netflix acquired 1,493,000 gross subscriber additions, representing 29 percent year-over-year growth from 1,156,000 gross subscriber additions in the fourth quarter of 2005 and 14 percent quarter-over-quarter growth from 1,310,000 gross subscriber additions in the third quarter of 2006.

Of the 6,316,000 total subscribers at quarter end, 97 percent, or 6,154,000, were paid subscribers. The other 3 percent, or 162,000, were free subscribers. Paid subscribers represented 96 percent of total subscribers at the end of the fourth quarter of 2005 and 97 percent of total subscribers at the end of the third quarter of 2006.

Business Outlook

The Company's performance expectations for the first quarter of 2007 and full-year 2007 are as follows:

First-Quarter 2007
-- Ending subscribers of 6.7 million to 7.0 million
-- Revenue of $304 million to $310 million
-- GAAP net income of $9 million to $13 million, or $0.13 to $0.18 per
diluted share

Full-Year 2007
-- Ending subscribers of 8.0 million to 8.4 million
-- Revenue of $1.25 billion to $1.3 billion
-- GAAP net income of $55 million to $60 million, or $0.76 to $0.83 per
diluted share

Float and Trading Plans

The Company estimates the public float at approximately 55,863,475 shares as of December 31, 2006, up 1 percent from 55,230,571 shares as of September 30, 2006, 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 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 4:30 p.m. Eastern Time / 1:30 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 3:30 p.m. Pacific Time on January 24, 2007 through January 29, 2007. To listen to a replay, call (719) 457-0820, access code 6497808.

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 six million subscribers access to over 70,000 DVD titles. The company offers a variety of subscription plans, starting at $5.99 a month. 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 one billion movie ratings. Netflix also allows members to share and recommend movies to one another through its Friends(SM) 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, GAAP net income and earnings per share for the first quarter of 2007 as well as subscriber growth, revenue, GAAP net income and earnings per share for the full-year 2007. 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 cost of content 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 16, 2006. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

(1) The Company had previously recorded proceeds from sales of previously
viewed DVDs and the related cost of DVDs sales as Sales revenue and
Cost of sales revenue, respectively. The Company now records the net
gain on sales of DVDs as a separate line item on the income
statement.

(2) Gross margin is defined as revenue less cost of subscription and
fulfillment expense. The Company had previously recorded fulfillment
expense as an operating expense.

(3) 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.

(4) Subscriber acquisition cost is defined as the total marketing
expense, which includes stock-based compensation for marketing
personnel, on the Company's Statement of Operations divided by total
gross subscriber additions during the quarter.

(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.

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,
2005 2006 2006 2005 2006

Revenues $193,000 $255,950 $277,233 $682,213 $996,660
Cost of revenues:
Subscription 101,967 135,210 142,586 393,788 532,621
Fulfillment expenses* 19,189 23,583 26,762 71,987 94,364
Total cost of
revenues 121,156 158,793 169,348 465,775 626,985
Gross profit 71,844 97,157 107,885 216,438 369,675
Operating expenses:
Technology and
development * 9,219 11,929 13,201 35,388 48,379
Marketing * 47,591 59,367 66,158 144,562 225,524
General and
administrative * 13,024 9,948 11,142 35,486 36,155
Gain on disposal of
DVDs (788) (1,142) (1,304) (1,987) (4,797)
Total operating
expenses 69,046 80,102 89,197 213,449 305,261
Operating income 2,798 17,055 18,688 2,989 64,414
Other income (expense):
Interest and other
income 1,965 4,687 5,064 5,753 15,904
Interest and other
expense (353) - - (407) -
Income before income
taxes 4,410 21,742 23,752 8,335 80,318
Provision for income
taxes (33,801) 8,961 8,892 (33,692) 31,236
Net income $38,211 $12,781 $14,860 $42,027 $49,082
Net income per share:
Basic $.70 $.19 $.22 $.79 $.78
Diluted $.57 $.18 $.21 $.64 $.71
Weighted average common
shares outstanding:
Basic 54,393 68,081 68,424 53,528 62,577
Diluted 66,962 70,345 70,670 65,518 69,075

Amortization of stock-
based compensation
included in expense
line items:
Fulfillment $225 $213 $229 $1,225 $925
Technology and
development 951 884 892 4,446 3,608
Marketing 602 540 515 2,565 2,138
General and
administrative 1,554 1,532 1,494 6,091 6,025
$3,332 $3,169 $3,130 $14,327 $12,696

Reconciliation of Non-
GAAP Financial
Measures
Non-GAAP net income
reconciliation:
Net income $38,211 $12,781 $14,860 $42,027 $49,082
Add back:
Stock-based
compensation 3,332 3,169 3,130 14,327 12,696
Income tax effect of
stock-based
compensation - (1,306) (1,171) - (4,950)
Non-GAAP net income $41,543 $14,644 $16,819 $56,354 $56,828
Non-GAAP net income per
share:
Basic $.76 $.22 $.25 $1.05 $.91
Diluted $.62 $.21 $.24 $.86 $.82
Weighted average common
shares outstanding:
Basic 54,393 68,081 68,424 53,528 62,577
Diluted 66,962 70,345 70,670 65,518 69,075

* Stock-based compensation recognized in the three and twelve months ended
December 31, 2005 has been reclassed to this expense line to conform
with the current period presentation.

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

As of
December 31, December 31,
2005 2006
Assets
Current assets:
Cash and cash equivalents $212,256 $400,430
Prepaid expenses 7,848 4,742
Prepaid revenue sharing expenses 5,252 9,456
Deferred tax assets 13,666 3,155
Other current assets 4,669 10,635
Total current assets 243,691 428,418
DVD library, net 57,032 104,908
Intangible assets, net 457 969
Property and equipment, net 40,213 55,503
Deposits 1,249 1,316
Deferred tax assets 21,239 15,600
Other assets 800 2,065
Total assets $364,681 $608,779
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $63,491 $93,864
Accrued expenses 25,563 29,905
Deferred revenue 48,533 69,678
Total current liabilities 137,587 193,447
Deferred rent 842 1,121
Total liabilities 138,429 194,568
Stockholders' equity:
Common stock, $0.001 par value;
160,000,000 shares authorized
at December 31, 2005 and 2006;
54,755,731 and 68,612,463 issued
and outstanding at December 31,
2005 and 2006, respectively 55 69
Additional paid-in capital 315,868 454,731
Accumulated deficit (89,671) (40,589)
Total stockholders' equity 226,252 414,211
Total liabilities and
stockholders' equity $364,681 $608,779

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,
2005 2006 2006 2005 2006
Cash flows from
operating activities:
Net income $38,211 $12,781 $14,860 $42,027 $49,082
Adjustments to
reconcile net income
to net cash
provided by operating
activities:
Depreciation of
property and
equipment 2,616 4,066 4,374 9,134 15,903
Amortization of DVD
library 24,848 36,253 45,716 96,883 141,160
Amortization of
intangible assets 12 25 25 985 73
Stock-based
compensation expense 3,332 3,169 3,130 14,327 12,696
Excess tax benefits
from stock-based
compensation - (3,923) (5,652) - (13,217)
Loss on disposal of
property and
equipment - - - - (23)
Gain on disposal of
DVDs (1,432) (2,241) (2,770) (3,588) (9,089)
Noncash interest
expense - - - 11 -
Deferred taxes (34,905) 4,126 2,651 (34,905) 16,150
Changes in operating
assets and
liabilities:
Prepaid expenses and
other current
assets (7,737) (143) (3,134) (4,884) (7,064)
Accounts payable 14,863 (2,624) 3,178 8,246 3,208
Accrued expenses 5,159 9,049 4,918 12,432 17,559
Deferred revenue 14,133 846 19,803 16,597 21,145
Deferred rent (33) 78 12 242 279
Net cash provided
by operating
activities 59,067 61,462 87,111 157,507 247,862
Cash flows from
investing activities:
Purchases of property
and equipment (10,434) (5,231) (11,524) (27,653) (27,333)
Acquisition of
intangible asset - - - (481) (585)
Acquisitions of DVD
library (27,056) (37,255) (56,289) (111,446) (169,528)
Proceeds from sale of
DVDs 2,040 3,675 3,977 5,781 12,886
Proceeds from disposal
of property and
equipment - - - - 23
Deposits and other
assets 716 (311) (804) 551 (1,332)
Net cash used in
investing
activities (34,734) (39,122) (64,640) (133,248) (185,869)
Cash flows from
financing activities:
Proceeds from issuance
of common stock 5,815 776 3,566 13,393 112,964
Principal payments on
notes payable and
capital lease
obligations - - - (79) -
Excess tax benefits
from stock-based
compensation - 3,923 5,652 - 13,217
Net cash provided
by financing
activities 5,815 4,699 9,218 13,314 126,181
Effect of exchange rate
changes on cash and
cash equivalents 222 - - 222 -
Net increase in cash
and cash equivalents 30,370 27,039 31,689 37,795 188,174
Cash and cash
equivalents, beginning
of period 181,886 341,702 368,741 174,461 212,256
Cash and cash
equivalents, end of
period $212,256 $368,741 $400,430 $212,256 $400,430

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $59,067 $61,462 $87,111 $157,507 $247,862
Purchases of property
and equipment (10,434) (5,231) (11,524) (27,653) (27,333)
Acquisition of
intangible asset - - - (481) (585)
Acquisitions of DVD
library (27,056) (37,255) (56,289) (111,446) (169,528)
Proceeds from sale of
DVDs 2,040 3,675 3,977 5,781 12,886
Proceeds from disposal
of property and
equipment - - - - 23
Deposits and other
assets 716 (311) (804) 551 (1,332)
Non-GAAP free cash flow $24,333 $22,340 $22,471 $24,259 $61,993

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

As of / As of / Twelve
Three Months Ended Months Ended
December September December December December
31, 30, 31, 31, 31,
2005 2006 2006 2005 2006
Subscriber information:
Subscribers: beginning of
period 3,592 5,169 5,662 2,610 4,179
Gross subscribers additions:
during period 1,156 1,310 1,493 3,729 5,250
Gross subscriber additions
year-to-year change 47.6% 42.2% 29.2% 37.3% 40.8%
Gross subscriber additions
quarter-to-quarter sequential
change 25.5% 22.4% 14.0% - -
Less subscriber cancellations :
during period (569) (817) (839) (2,160) (3,113)
Subscribers: end of period 4,179 5,662 6,316 4,179 6,316
Subscribers year-to-year change 60.1% 57.6% 51.1% 60.1% 51.1%
Subscribers quarter-to-quarter
sequential change 16.3% 9.5% 11.6% - -
Free subscribers: end of period 153 173 162 153 162
Free subscribers as percentage
of ending subscribers 3.7% 3.1% 2.6% 3.7% 2.6%
Paid subscribers: end of period 4,026 5,489 6,154 4,026 6,154
Paid subscribers year-to-year
change 61.9% 60.4% 52.9% 61.9% 52.9%
Paid subscribers quarter-to-
quarter sequential change 17.6% 9.4% 12.1% - -
Churn 4.0% 4.2% 3.9% - -
Subscriber acquisition cost $41.17 $45.32 $44.31 $38.77 $42.96
Margins:
Gross margin 37.2% 38.0% 38.9% 31.7% 37.1%
Operating margin 1.4% 6.7% 6.7% 0.4% 6.5%
Net margin 19.8% 5.0% 5.4% 6.2% 4.9%
Expenses as percentage of
revenues:
Technology and development 4.8% 4.7% 4.8% 5.2% 4.9%
Marketing 24.7% 23.2% 23.9% 21.2% 22.6%
General and administrative 6.7% 3.9% 4.0% 5.2% 3.6%
Gain on disposal of DVDs (0.4%) (0.5%) (0.5%) (0.3%) (0.5%)
Total operating expenses 35.8% 31.3% 32.2% 31.3% 30.6%
Year-to-year change:
Total revenues 37.2% 48.2% 43.6% 36.3% 46.1%
Fulfillment 13.9% 32.7% 39.5% 23.5% 31.1%
Technology and development 26.5% 33.2% 43.2% 20.1% 36.7%
Marketing 63.1% 77.4% 39.0% 43.8% 56.0%
General and administrative 74.7% 4.3% (14.5%) 60.5% 1.9%
Gain on disposal of DVDs (22.0%) 194.3% 65.5% (22.4%) 141.4%
Total operating expenses 60.9% 55.3% 29.2% 42.7% 43.0%

FCMN Contact: ekasenchak@netflix.com

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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