Netflix Announces Q4 2007 Financial Results

Netflix Announces Q4 2007 Financial Results

Subscribers - 7.5 million

Revenue - $302.4 million

GAAP Net Income - $15.8 million

GAAP EPS - $0.24 per diluted share

LOS GATOS, Calif., Jan. 23 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2007.

"We achieved strong results in 2007 -- ending subscribers up 18 percent, revenue up 21 percent and net income up 36 percent -- despite facing tough competition for much of the year and investing strategically in our online video initiatives," said Reed Hastings, Netflix co-founder and chief executive officer.

"The emergence of a bundled service that enables our subscribers to receive DVDs through the mail fast and movies and TV episodes over the Internet instantly, positions us to achieve solid growth in 2008 and over the long term."

Fourth-Quarter and Fiscal-Year 2007 Financial Highlights

Revenue for the fourth quarter of 2007 was $302.4 million, representing 9 percent year-over-year growth from $277.2 million for the fourth quarter of 2006, and 3 percent sequential increase from $294.0 million for the third quarter of 2007. Revenue for fiscal 2007 was $1.205 billion, up 21 percent from $996.7 million for fiscal 2006.

GAAP net income for the fourth quarter of 2007 was $15.8 million, or $0.24 per diluted share, compared to GAAP net income of $14.9 million, or $0.21 per diluted share, for the fourth quarter of 2006 and GAAP net income of $15.7 million, or $0.23 per diluted share, for the third quarter of 2007.

GAAP net income for fiscal 2007 was $67.0 million, or $0.97 per diluted share, compared to GAAP net income of $49.1 million, or $0.71 per diluted share, for fiscal 2006.

Non-GAAP net income was $17.8 million, or $0.27 per diluted share, for the fourth quarter of 2007, compared to non-GAAP net income of $16.8 million, or $0.24 per diluted share, for the fourth quarter of 2006 and non-GAAP net income of $17.6 million, or $0.26 per diluted share, for the third quarter of 2007.

Non-GAAP net income was $74.2 million, or $1.08 per diluted share, for fiscal 2007 compared to non-GAAP net income of $56.8 million, or $0.82 per diluted share for fiscal 2006.

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

Gross margin(1) for the fourth quarter of 2007 was 33.8 percent, compared to 38.9 percent for the fourth quarter of 2006 and 33.9 percent for the third quarter of 2007. Gross margin for fiscal 2007 was 34.8 percent, compared to 37.1 percent for fiscal 2006.

Free cash flow(2) for the fourth quarter of 2007 was $21.0 million, compared to $22.5 million in the fourth quarter of 2006 and $36.1 million for the third quarter of 2007. Free cash flow for fiscal 2007 was $45.5 million as compared to $62.0 million in fiscal 2006.

Cash provided by operating activities for the fourth quarter of 2007 was $84.4 million, compared to $87.1 million for the fourth quarter of 2006 and $77.6 million for the third quarter of 2007. Cash provided by operating activities for fiscal 2007 was $290.1 million, compared to $247.9 million for fiscal 2006.

Subscribers. Netflix ended the fourth quarter of 2007 with approximately 7,479,000 total subscribers, representing 18 percent year-over-year growth from 6,316,000 total subscribers at the end of the fourth quarter of 2006 and 6 percent sequential growth from 7,028,000 subscribers at the end of the third quarter of 2007.

Net subscriber change in the quarter was an increase of 451,000, compared to an increase of 654,000 for the same period of 2006 and an increase of 286,000 for the third quarter of 2007.

Gross subscriber additions for the quarter totaled 1,495,000, essentially flat year-over-year from 1,493,000 gross subscriber additions in the fourth quarter of 2006 and 15 percent quarter-over-quarter growth from 1,297,000 gross subscriber additions in the third quarter of 2007.

Of the 7,479,000 total subscribers at quarter end, 98 percent, or 7,326,000 were paid subscribers. The other 2 percent, or 153,000, were free subscribers. Paid subscribers represented 97 percent of total subscribers at the end of the fourth quarter of 2006 and at the end of the third quarter of 2007.

Subscriber acquisition cost(3) for the fourth quarter of 2007 was $34.60 per gross subscriber addition, compared to $44.31 for the same period of 2006 and $37.91 for the third quarter of 2007. SAC for fiscal 2007 was $40.88 per gross subscriber addition compared to $42.96 for fiscal 2006.

Churn(4) for the fourth quarter of 2007 was 4.1 percent, compared to 3.9 percent for the fourth quarter of 2006 and 4.2 percent for the third quarter of 2007. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Stock-based compensation for the fourth quarter of 2007 was $3.2 million, compared to $3.1 million in the fourth quarter of 2006 and the third quarter of 2007. Stock-based compensation for fiscal 2007 was $12.0 million, compared to $12.7 million for fiscal 2006. Stock-based compensation is presented in the same lines of the Consolidated Statements of Operations as cash compensation paid to the same individuals.

Business Outlook

The Company's performance expectations for the first quarter of 2008 and full-year 2008 are as follows:

First-Quarter 2008
-- Ending subscribers of 7.85 million to 8.05 million
-- Revenue of $323 million to $328 million
-- GAAP net income of $9 million to $14 million
-- GAAP EPS of $0.13 to $0.21 per diluted share

Full-Year 2008
-- Ending subscribers of 8.4 million to 8.9 million
-- Revenue of $1.3 billion to $1.35 billion
-- GAAP net income of $75 million to $83 million
-- GAAP EPS of $1.12 to $1.24 per diluted share

Float and Trading Plans

The Company estimates the public float at approximately 52,723,123 shares as of December 31, 2007, down approximately 1 percent from 53,352,707 shares as of September 30, 2007, 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/. 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 23, 2008 through January 26, 2008 at 9:00 p.m. Pacific Time. To listen to the telephone replay, call (719) 457-0820, access code 6179304.

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 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, providing more than seven million subscribers access to more than 90,000 DVD titles plus a growing library of more than 6,000 choices that can be watched instantly on their PCs. The company offers nine subscription plans, starting at only $4.99 per month. There are no due dates and no late fees -- ever. All Netflix plans include both DVDs delivered to subscribers' homes and, for no additional fee, movies and TV series that can be started in as little as 30 seconds on subscribers' PCs. DVDs are delivered free to members by first class mail, with a postage-paid return envelope, from over 100 U.S. shipping points. Nearly 95 percent of Netflix subscribers live in areas that can be reached with generally one business day delivery. Netflix offers personalized movie recommendations and has two billion movie ratings. 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 2008 and the full-year 2008. 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; impacts arising out of competition; our ability to manage our subscriber acquisition cost as well as the cost of content delivered to our subscribers; changes in pricing; fluctuations in consumer usage of our service; 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 or electronic content; 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; 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 28, 2007. 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.
(2) 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.
(3) 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.
(4) 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,
2007 2007 2006 2007 2006

Revenues $302,355 $293,972 $277,233 $1,205,340 $996,660
Cost of revenues:
Subscription 168,673 163,707 142,586 664,407 532,621
Fulfillment expenses* 31,377 30,746 26,762 121,761 94,364
Total cost of
revenues 200,050 194,453 169,348 786,168 626,985
Gross profit 102,305 99,519 107,885 419,172 369,675
Operating expenses:
Technology and
development* 18,557 18,216 13,201 71,395 48,379
Marketing* 51,721 49,166 66,158 218,280 225,524
General and
administrative* 13,602 12,895 11,142 52,532 36,155
Gain on disposal of
DVDs (1,696) (2,310) (1,304) (7,196) (4,797)
Gain on legal
settlement - - - (7,000) -
Total operating
expenses 82,184 77,967 89,197 328,011 305,261
Operating income 20,121 21,552 18,688 91,161 64,414
Other income:
Interest and other
income 4,929 5,089 5,064 20,340 15,904
Income before income
taxes 25,050 26,641 23,752 111,501 80,318
Income taxes 9,274 10,909 8,892 44,549 31,236
Net income $15,776 $15,732 $14,860 $66,952 $49,082
Net income per share:
Basic $0.24 $0.24 $0.22 $1.00 $0.78
Diluted $0.24 $0.23 $0.21 $0.97 $0.71
Weighted average common
shares outstanding:
Basic 65,156 66,469 68,424 67,076 62,577
Diluted 67,042 68,090 70,670 68,902 69,075

*Stock-based
compensation included
in expense line items:
Fulfillment expenses $100 $99 $229 $427 $925
Technology and
development 1,105 1,002 892 3,695 3,608
Marketing 561 547 515 2,160 2,138
General and
administrative 1,476 1,465 1,494 5,694 6,025

Reconciliation of Non-
GAAP Financial Measures
(Unaudited)
Non-GAAP net income
reconciliation:
GAAP net income $15,776 $15,732 $14,860 $66,952 $49,082
Stock-based
compensation 3,242 3,113 3,130 11,976 12,696
Income tax effect of
stock-based
compensation (1,200) (1,273) (1,171) (4,757) (4,950)
Non-GAAP net income $17,818 $17,572 $16,819 $74,171 $56,828
Non-GAAP net income
per share:
Basic $0.27 $0.26 $0.25 $1.11 $0.91
Diluted $0.27 $0.26 $0.24 $1.08 $0.82
Weighted average
common shares
outstanding:
Basic 65,156 66,469 68,424 67,076 62,577
Diluted 67,042 68,090 70,670 68,902 69,075

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
As of
December 31, December 31,
2007 2006
Assets
Current assets:
Cash and cash equivalents $177,439 $400,430
Short-term investments 207,703 -
Prepaid expenses 6,116 4,742
Prepaid revenue sharing expenses 6,983 9,456
Deferred tax assets 2,254 3,155
Other current assets 16,037 10,635
Total current assets 416,532 428,418
Content library, net 132,455 104,908
Property and equipment, net 77,326 55,503
Deferred tax assets 16,242 15,600
Other assets 4,465 4,350
Total assets $647,020 $608,779
Liabilities and Stockholders'
Equity
Current liabilities:
Accounts payable $104,445 $93,864
Accrued expenses 36,466 29,905
Deferred revenue 71,665 69,678
Total current liabilities 212,576 193,447
Other liabilities 3,695 1,121
Total liabilities 216,271 194,568
Stockholders' equity:
Common stock, $0.001 par value;
160,000,000 shares authorized at
December 31, 2007 and December 31, 2006;
64,912,915 and 68,612,463 issued and
outstanding at December 31, 2007 and
December 31, 2006, respectively 65 69
Additional paid-in capital 402,710 454,731
Accumulated other comprehensive income 1,611 -
Retained earnings (accumulated deficit) 26,363 (40,589)
Total stockholders' equity 430,749 414,211
Total liabilities and
stockholders' equity $647,020 $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,
2007 2007 2006 2007 2006
Cash flows from
operating activities:
Net income $15,776 $15,732 $14,860 $66,952 $49,082
Adjustments to
reconcile net income
to net cash provided
by operating activities:
Depreciation of
property and equipment 5,915 5,752 4,374 21,394 15,903
Amortization of
content library 54,751 48,237 45,716 203,415 141,160
Amortization of
intangible assets 79 25 25 153 73
Amortization of
discounts and
premiums on
investments 72 23 - 24 -
Stock-based
compensation expense 3,242 3,113 3,130 11,976 12,696
Excess tax benefits
from stock-based
compensation (4,984) (5,170) (5,652) (26,248) (13,217)
Gain (loss) on
disposal of property
and equipment 14 128 - 142 (23)
Gain on sale of
short-term
investments (323) (170) - (687) -
Gain on disposal of
DVDs (2,906) (3,937) (2,770) (14,637) (9,089)
Deferred taxes 399 (300) 2,651 (661) 16,150
Changes in operating
assets and liabilities:
Prepaid expenses and
other current assets 192 111 (3,134) (4,303) (7,064)
Accounts payable (2,514) 6,048 3,178 (2,901) 3,208
Accrued expenses (567) 11,433 4,918 32,809 17,559
Deferred revenue 15,344 (4,201) 19,803 1,987 21,145
Other liabilities (82) 741 12 724 279
Net cash provided
by operating
activities 84,408 77,565 87,111 290,139 247,862
Cash flows from
investing activities:
Purchases of short-term
investments (35,228) (51,972) - (405,340) -
Proceeds from sale of
short-term investments 35,453 41,264 - 200,832 -
Purchases of property
and equipment (9,863) (7,412) (11,524) (44,256) (27,333)
Acquisition of
intangible asset (550) - - (550) (585)
Acquisitions of content
library (56,406) (39,452) (56,289) (221,752) (169,528)
Proceeds from sale of
DVDs 3,884 4,760 3,977 21,640 12,886
Proceeds from disposal
of property and
equipment 15 - - 15 23
Other assets (497) 615 (804) 282 (1,332)
Net cash used in
investing
activities (63,192) (52,197) (64,640) (449,129) (185,869)
Cash flows from
financing activities:
Proceeds from issuance
of common stock 5,745 417 3,566 9,609 112,964
Excess tax benefits
from stock-based
compensation 4,984 5,170 5,652 26,248 13,217
Repurchases of common
stock (34,310) (35,333) - (99,858) -
Net cash (used in)
provided by
financing
activities (23,581) (29,746) 9,218 (64,001) 126,181
Net increase (decrease)
in cash and cash
equivalents (2,365) (4,378) 31,689 (222,991) 188,174
Cash and cash
equivalents, beginning
of period 179,804 184,182 368,741 400,430 212,256
Cash and cash
equivalents, end of
period $177,439 $179,804 $400,430 $177,439 $400,430

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $84,408 $77,565 $87,111 $290,139 $247,862
Purchases of property
and equipment (9,863) (7,412) (11,524) (44,256) (27,333)
Acquisition of
intangible asset (550) - - (550) (585)
Acquisitions of content
library (56,406) (39,452) (56,289) (221,752) (169,528)
Proceeds from sale of
DVDs 3,884 4,760 3,977 21,640 12,886
Proceeds from disposal
of property and equipment 15 - - 15 23
Other assets (497) 615 (804) 282 (1,332)
Non-GAAP free cash flow $20,991 $36,076 $22,471 $45,518 $61,993

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, 30, 31,
2007 2007 2006
Subscriber information:
Subscribers: beginning of period 7,028 6,742 5,662
Gross subscribers additions:
during period 1,495 1,297 1,493
Gross subscriber additions year-
to-year change 0.1% (1.0%) 29.2%
Gross subscriber additions
quarter-to-quarter sequential change 15.3% 26.2% 14.0%
Less subscriber cancellations:
during period (1,044) (1,011) (839)
Subscribers: end of period 7,479 7,028 6,316
Subscribers year-to-year change 18.4% 24.1% 51.1%
Subscribers quarter-to-quarter
sequential change 6.4% 4.2% 11.6%
Free subscribers: end of period 153 183 162
Free subscribers as percentage of
ending subscribers 2.0% 2.6% 2.6%
Paid subscribers: end of period 7,326 6,845 6,154
Paid subscribers year-to-year
change 19.0% 24.7% 52.9%
Paid subscribers quarter-to-
quarter sequential change 7.0% 3.6% 12.1%
Average monthly revenue per paying
subscriber $14.22 $14.57 $15.87
Churn 4.1% 4.2% 3.9%
Subscriber acquisition cost $34.60 $37.91 $44.31
Margins:
Gross margin 33.8% 33.9% 38.9%
Operating margin 6.7% 7.4% 6.7%
Net margin 5.2% 5.4% 5.4%
Expenses as percentage of revenues:
Technology and development 6.1% 6.2% 4.8%
Marketing 17.1% 16.7% 23.9%
General and administrative 4.5% 4.4% 4.0%
Gain on disposal of DVDs (0.5%) (0.8%) (0.5%)
Total operating expenses 27.2% 26.5% 32.2%
Year-to-year change:
Total revenues 9.1% 14.9% 43.6%
Fulfillment 17.2% 30.4% 39.5%
Technology and development 40.6% 52.7% 43.2%
Marketing (21.8%) (17.2%) 39.0%
General and administrative 22.1% 29.6% (14.5%)
Gain on disposal of DVDs 30.1% 102.3% 65.5%
Total operating expenses (7.9%) (2.7%) 29.2%

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

Source: Netflix, Inc.

CONTACT: IR, Deborah Crawford, VP of Investor Relations,
+1-408-540-3712, or PR, Steve Swasey, VP of Corporate Communications,
+1-408-540-3947, both of Netflix

Web site:

http://www.netflix.com/

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