Netflix Announces Q2 2008 Financial Results

Netflix Announces Q2 2008 Financial Results

Subscribers - 8.4 million

Revenue - $337.6 million

GAAP Net Income - $26.6 million

GAAP EPS - $0.42 per diluted share

LOS GATOS, Calif., July 25 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2008.

"We are pleased to announce another quarter of strong financial results," said Reed Hastings, Netflix co-founder and chief executive officer.

"This quarter we delivered 25 percent year-over-year growth in subscribers, our lowest SAC ever as a public company, and a 14 percent increase in EPS for the quarter. And we made important progress on our strategy of offering our subscribers the option of streaming video directly to their TVs with the introduction of The Netflix Player by Roku(TM) in May and the announcement earlier this month of our agreement with Microsoft to embed Netflix streaming capability in the Xbox 360 video game and entertainment system."

Second-Quarter 2008 Financial Highlights

Subscribers. Netflix ended the second quarter of 2008 with approximately 8,411,000 total subscribers, representing 25 percent year-over-year growth from 6,742,000 total subscribers at the end of the second quarter of 2007 and 2 percent sequential growth from 8,243,000 subscribers at the end of the first quarter of 2008.

Net subscriber change in the quarter was an increase of 168,000, compared to a decrease of 55,000 for the same period of 2007 and an increase of 764,000 for the first quarter of 2008.

Gross subscriber additions for the quarter totaled 1,384,000, representing 35 percent year-over-year growth from 1,028,000 gross subscriber additions in the second quarter of 2007 and 26 percent quarter-over-quarter decline from 1,862,000 gross subscriber additions in the first quarter of 2008.

Of the 8,411,000 total subscribers at quarter end, 98 percent, or 8,235,000 were paid subscribers. The other 2 percent, or 176,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2007 and at the end of the first quarter of 2008.

Revenue for the second quarter of 2008 was $337.6 million, representing 11 percent year-over-year growth from $303.7 million for the second quarter of 2007, and 4 percent sequential increase from $326.2 million for the first quarter of 2008.

Gross margin (1) for the second quarter of 2008 was 31.8 percent, compared to 35.2 percent for the second quarter of 2007 and 31.7 percent for the first quarter of 2008.

GAAP net income for the second quarter of 2008 was $26.6 million, or $0.42 per diluted share, compared to GAAP net income of $25.6 million, or $0.37 per diluted share, for the second quarter of 2007 and GAAP net income of $13.4 million, or $0.21 per diluted share, for the first quarter of 2008. GAAP net income grew 4 percent on a year-over-year basis and GAAP EPS grew 14 percent on a year-over-year basis.

Non-GAAP net income was $28.7 million, or $0.45 per diluted share, for the second quarter of 2008, compared to non-GAAP net income of $27.2 million, or $0.39 per diluted share, for the second quarter of 2007 and non-GAAP net income of $15.2 million, or $0.23 per diluted share, for the first quarter of 2008. Non-GAAP net income grew 5 percent on a year-over-year basis and non- GAAP EPS grew 15 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 for the second quarter of 2008 was $2.9 million, compared to $2.8 million in the second quarter of 2007 and $3.1 million in the first quarter of 2008. 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 2008 was $28.95 per gross subscriber addition, compared to $44.02 for the same period of 2007 and $29.50 for the first quarter of 2008.

Churn(3) for the second quarter of 2008 was 4.2 percent, compared to 4.6 percent for the second quarter of 2007 and 3.9 percent for the first quarter of 2008. 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 2008 was $12.5 million, compared to $6.5 million in the second quarter of 2007 and $4.7 million for the first quarter of 2008.

Cash provided by operating activities for the second quarter of 2008 was $77.9 million, compared to $65.1 million for the second quarter of 2007 and $77.7 million for the first quarter of 2008.

(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
excluding 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.

Business Outlook

The Company's performance expectations for the third and fourth quarters of 2008 and full-year 2008 are as follows:

Third-Quarter 2008
-- Ending subscribers of 8.675 million to 8.875 million
-- Revenue of $343 million to $348 million
-- GAAP net income of $16 million to $21 million
-- GAAP EPS of $0.26 to $0.34 per diluted share

Fourth-Quarter 2008
-- Ending subscribers of 9.1 million to 9.7 million
-- Revenue of $357 million to $367 million
-- GAAP net income of $18 million to $23 million
-- GAAP EPS of $0.29 to $0.37 per diluted share

Full-Year 2008
-- Ending subscribers of 9.1 million to 9.7 million, unchanged from prior
guidance
-- Revenue of $1.364 billion to $1.379 billion, tightened from $1.35
billion to $1.39 billion
-- GAAP net income of $75 million to $83 million, unchanged from prior
guidance
-- GAAP EPS of $1.19 to $1.31 per diluted share, increased from $1.16 to
$1.29 per diluted share

Float and Trading Plans

The Company estimates the public float at approximately 49,996,277 shares as of June 30, 2008, up approximately 1 percent from 49,498,642 shares as of March 31, 2008, 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 8:30 a.m. Eastern Time / 5:30 a.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 in the hour allotted to the earnings call.

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 8:30 a.m. Pacific Time on July 25, 2008 through July 29, 2008 at 9:00 p.m. Pacific Time. To listen to the telephone replay, call (719) 457-0820, access code 4599200.

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, providing more than eight million subscribers access to over 100,000 DVD titles plus a growing library of over 12,000 titles 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 more than 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 third and fourth quarters 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, 2008. 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,
2008 2008 2007 2008 2007

Revenues $337,614 $326,183 $303,693 $663,797 $609,013
Cost of revenues:
Subscription 193,769 187,156 166,838 380,925 332,027
Fulfillment expenses * 36,318 35,649 29,855 71,967 59,638
Total cost of
revenues 230,087 222,805 196,693 452,892 391,665
Gross profit 107,527 103,378 107,000 210,905 217,348
Operating expenses:
Technology and
development * 22,670 20,516 18,907 43,186 34,622
Marketing * 40,062 54,936 45,255 94,998 117,393
General and
administrative * 13,568 13,816 13,847 27,384 26,035
Gain on disposal of
DVDs (2,263) (833) (2,282) (3,096) (3,190)
Gain on legal
settlement - - (7,000) - (7,000)
Total operating
expenses 74,037 88,435 68,727 162,472 167,860
Operating income 33,490 14,943 38,273 48,433 49,488
Other income (expense):
Interest and other
income (expense) 2,404 7,660 4,972 10,064 10,322
Income before income
taxes 35,894 22,603 43,245 58,497 59,810
Provision for income
taxes 9,333 9,225 17,665 18,558 24,366
Net income $26,561 $13,378 $25,580 $39,939 $35,444
Net income per share:
Basic $0.43 $0.21 $0.38 $0.64 $0.52
Diluted $0.42 $0.21 $0.37 $0.62 $0.50
Weighted average common
shares outstanding:
Basic 61,782 62,776 68,031 62,262 68,360
Diluted 63,857 64,840 69,891 64,341 70,276

*Stock-based compensation
included in expense
line items:
Fulfillment expenses $108 $106 $82 $214 $228
Technology and
development 849 996 831 1,845 1,588
Marketing 455 509 521 964 1,052
General and
administrative 1,493 1,519 1,384 3,012 2,753

Reconciliation of Non-
GAAP Financial Measures
(unaudited)
Non-GAAP net income
reconciliation:
GAAP net income $26,561 $13,378 $25,580 $39,939 $35,444
Stock-based
compensation 2,905 3,130 2,818 6,035 5,621
Income tax effect of
stock-based
compensation (755) (1,277) (1,150) (2,032) (2,284)
Non-GAAP net income $28,711 $15,231 $27,248 $43,942 $38,781
Non-GAAP net income per
share:
Basic $0.46 $0.24 $0.40 $0.71 $0.57
Diluted $0.45 $0.23 $0.39 $0.68 $0.55
Weighted average common
shares outstanding:
Basic 61,782 62,776 68,031 62,262 68,360
Diluted 63,857 64,840 69,891 64,341 70,276

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
As of
June 30, December 31,
2008 2007
Assets
Current assets:
Cash and cash equivalents $144,289 $177,439
Short-term investments 169,175 207,703
Prepaid expenses 7,631 6,116
Prepaid revenue sharing expenses 14,861 6,983
Deferred tax assets 3,339 2,254
Other current assets 19,859 16,037
Total current assets 359,154 416,532
Content library, net 126,928 132,455
Property and equipment, net 90,779 77,326
Deferred tax assets 18,988 16,242
Other assets 10,767 4,465
Total assets $606,616 $647,020
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $109,000 $104,445
Accrued expenses 27,462 36,466
Deferred revenue 67,886 71,665
Total current liabilities 204,348 212,576
Other liabilities 11,853 3,695
Total liabilities 216,201 216,271
Stockholders' equity:
Common stock, $0.001 par value;
160,000,000 shares authorized
at June 30, 2008 and December 31,
2007; 61,910,603 and 64,912,915
issued and outstanding at June
30, 2008 and December 31, 2007,
respectively 62 65
Additional paid-in capital 324,865 402,710
Accumulated other comprehensive
(loss) income (814) 1,611
Retained earnings 66,302 26,363
Total stockholders' equity 390,415 430,749
Total liabilities and
stockholders' equity $606,616 $647,020

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,
2008 2008 2007 2008 2007
Cash flows from
operating activities:
Net income $26,561 $13,378 $25,580 $39,939 $35,444
Adjustments to
reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization of
property, equipment
and intangibles 7,849 6,359 5,151 14,208 9,776
Amortization of
content library 57,012 57,570 50,985 114,582 100,427
Amortization of
discounts and
premiums on
investments 177 139 11 316 (71)
Stock-based
compensation expense 2,905 3,130 2,818 6,035 5,621
Excess tax benefits
from stock-based
compensation (2,554) (820) (12,018) (3,374) (16,094)
Gain on sale of
short-term
investments 78 (4,320) (47) (4,242) (194)
Gain on disposal of
DVDs (4,059) (2,592) (5,197) (6,651) (7,794)
Deferred taxes (2,514) (836) (505) (3,350) (760)
Changes in operating
assets and
liabilities:
Prepaid expenses and
other current
assets (10,659) 2,562 5,660 (8,097) (4,606)
Accounts payable 9,124 (1,199) (17,834) 7,925 (6,435)
Accrued expenses (14,551) 7,827 14,244 (6,724) 21,943
Deferred revenue (489) (3,290) (3,712) (3,779) (9,156)
Other assets and
liabilities 9,035 (161) 1 8,874 65
Net cash provided
by operating
activities 77,915 77,747 65,137 155,662 128,166
Cash flows from
investing activities:
Purchases of short-term
investments (65,937) (91,954) (53,906) (157,891) (318,140)
Proceeds from sale of
short-term investments 21,682 175,319 28,693 197,001 124,115
Purchases of property
and equipment (14,662) (12,431) (8,968) (27,093) (26,981)
Acquisition of
intangible asset (1,000) - - (1,000) -
Acquisitions of content
library (55,175) (65,123) (57,353) (120,298) (125,894)
Proceeds from sale of
DVDs 5,379 4,507 7,370 9,886 12,996
Investment in business - (6,000) - (6,000) -
Other assets 20 8 267 28 164
Net cash (used in)
provided by
investing
activities (109,693) 4,326 (83,897) (105,367) (333,740)
Cash flows from
financing activities:
Proceeds from issuance
of common stock 4,524 8,542 2,681 13,066 3,447
Excess tax benefits
from stock-based
compensation 2,554 820 12,018 3,374 16,094
Repurchases of common
stock - (99,885) (30,215) (99,885) (30,215)
Net cash provided
by (used in)
financing
activities 7,078 (90,523) (15,516) (83,445) (10,674)
Net decrease in cash
and cash equivalents (24,700) (8,450) (34,276) (33,150) (216,248)
Cash and cash
equivalents, beginning
of period 168,989 177,439 218,458 177,439 400,430
Cash and cash
equivalents, end of
period $144,289 $168,989 $184,182 $144,289 $184,182

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $77,915 $77,747 $65,137 $155,662 $128,166
Purchases of property
and equipment (14,662) (12,431) (8,968) (27,093) (26,981)
Acquisition of
intangible asset (1,000) - - (1,000) -
Acquisitions of content
library (55,175) (65,123) (57,353) (120,298) (125,894)
Proceeds from sale of
DVDs 5,379 4,507 7,370 9,886 12,996
Other assets 20 8 267 28 164
Non-GAAP free cash flow $12,477 $4,708 $6,453 $17,185 $(11,549)

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
June 30, March 31, June 30,
2008 2008 2007
Subscriber information:
Subscribers: beginning of period 8,243 7,479 6,797
Gross subscriber additions: during
period 1,384 1,862 1,028
Gross subscriber additions year-
to-year change 34.6% 22.5% (3.9%)
Gross subscriber additions
quarter-to-quarter sequential
change (25.7%) 24.5% (32.4%)
Less subscriber cancellations:
during period (1,216) (1,098) (1,083)
Subscribers: end of period 8,411 8,243 6,742
Subscribers year-to-year change 24.8% 21.3% 30.4%
Subscribers quarter-to-quarter
sequential change 2.0% 10.2% (0.8%)
Free subscribers: end of period 176 141 133
Free subscribers as percentage of
ending subscribers 2.1% 1.7% 2.0%
Paid subscribers: end of period 8,235 8,102 6,609
Paid subscribers year-to-year
change 24.6% 21.4% 31.7%
Paid subscribers quarter-to-
quarter sequential change 1.6% 10.6% (1.0%)
Average monthly revenue per paying
subscriber $13.78 $14.09 $15.24
Churn 4.2% 3.9% 4.6%
Subscriber acquisition cost $28.95 $29.50 $44.02
Margins:
Gross margin 31.8% 31.7% 35.2%
Operating margin 9.9% 4.6% 12.6%
Net margin 7.9% 4.1% 8.4%
Expenses as percentage of revenues:
Technology and development 6.7% 6.3% 6.2%
Marketing 11.9% 16.8% 14.9%
General and administrative 4.0% 4.2% 4.6%
Gain on disposal of DVDs (0.7%) (0.2%) (0.8%)
Gain on legal settlement - - (2.3%)
Total operating expenses 21.9% 27.1% 22.6%
Year-to-year change:
Total revenues 11.2% 6.8% 26.9%
Fulfillment expenses 21.6% 19.7% 35.9%
Technology and development 19.9% 30.6% 57.0%
Marketing (11.5%) (23.8%) (3.8%)
General and administrative (2.0%) 13.4% 104.4%
Gain on disposal of DVDs (0.8%) (8.3%) 136.7%
Total operating expenses 7.7% (10.8%) 5.9%

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/

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