Netflix Announces Q3 2008 Financial Results

Netflix Announces Q3 2008 Financial Results

Subscribers - 8.7 million

Revenue - $341.3 million

GAAP Net Income - $20.4 million

GAAP EPS - $0.33 per diluted share

LOS GATOS, Calif., Oct. 20 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the third quarter ended September 30, 2008.

"In the third quarter we delivered strong earnings growth despite a challenging economic environment that contributed to slower-than-expected subscriber growth," said Reed Hastings, Netflix co-founder and chief executive officer. "Additionally, we made important progress in our expansion into Internet delivery with significant new content and hardware partnerships announced this past quarter."

Third-Quarter 2008 Financial Highlights

Subscribers. Netflix ended the third quarter of 2008 with approximately 8,672,000 total subscribers, representing 23 percent year-over-year growth from 7,028,000 total subscribers at the end of the third quarter of 2007 and 3 percent sequential growth from 8,411,000 subscribers at the end of the second quarter of 2008.

Net subscriber change in the quarter was an increase of 261,000, compared to an increase of 286,000 for the same period of 2007 and an increase of 168,000 for the second quarter of 2008.

Gross subscriber additions for the quarter totaled 1,528,000, representing 18 percent year-over-year growth from 1,297,000 gross subscriber additions in the third quarter of 2007 and 10 percent quarter-over-quarter growth from 1,384,000 gross subscriber additions in the second quarter of 2008.

Of the 8,672,000 total subscribers at quarter end, 98 percent, or 8,490,000 were paid subscribers. The other 2 percent, or 182,000, were free subscribers. Paid subscribers represented 97 percent of total subscribers at the end of the third quarter of 2007 and 98 percent of total subscribers at the end of the second quarter of 2008.

Revenue for the third quarter of 2008 was $341.3 million, representing 16 percent year-over-year growth from $294.0 million for the third quarter of 2007, and 1 percent sequential increase from $337.6 million for the second quarter of 2008.

Gross margin(1) for the third quarter of 2008 was 34.2 percent, compared to 33.9 percent for the third quarter of 2007 and 31.8 percent for the second quarter of 2008.

GAAP net income for the third quarter of 2008 was $20.4 million, or $0.33 per diluted share, compared to GAAP net income of $15.6 million, or $0.23 per diluted share, for the third quarter of 2007 and GAAP net income of $26.6 million, or $0.42 per diluted share, for the second quarter of 2008. GAAP net income grew 30 percent on a year-over-year basis and GAAP EPS grew 43 percent on a year-over-year basis.

Non-GAAP net income was $22.1 million, or $0.36 per diluted share, for the third quarter of 2008, compared to non-GAAP net income of $17.5 million, or $0.26 per diluted share, for the third quarter of 2007 and non-GAAP net income of $28.7 million, or $0.45 per diluted share, for the second quarter of 2008. Non-GAAP net income grew 27 percent on a year-over-year basis and non-GAAP EPS grew 38 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 third quarter of 2008 was $3.0 million, compared to $3.1 million in the third quarter of 2007 and $2.9 million in the second 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 third quarter of 2008 was $32.21 per gross subscriber addition, compared to $37.89 for the same period of 2007 and $28.89 for the second quarter of 2008.

Churn(3) for the third quarter of 2008 was 4.2 percent, compared to 4.2 percent for the third quarter of 2007 and for the second 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 third quarter of 2008 was $26.2 million, compared to $36.2 million in the third quarter of 2007 and $12.7 million for the second quarter of 2008.

Cash provided by operating activities for the third quarter of 2008 was $73.2 million, compared to $77.7 million for the third quarter of 2007 and $78.1 million for the second quarter of 2008.

Business Outlook

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

Fourth-Quarter 2008
-- Ending subscribers of 8.85 million to 9.15 million, down from 8.95
million to 9.25 million
-- Revenue of $351 million to $357 million, down slightly from $353
million to $359 million
-- GAAP net income of $18 million to $23 million, unchanged from prior
guidance
-- GAAP EPS of $0.30 to $0.38 per diluted share, unchanged from prior
guidance

Updated Full-Year 2008
-- Ending subscribers of 8.85 million to 9.15 million
-- Revenue of $1.356 billion to $1.362 billion
-- GAAP net income of $78.3 million to $83.3 million
-- GAAP EPS of $1.24 to $1.32 per diluted share

Float and Trading Plans

The Company estimates the public float at approximately 50,148,071 shares as of September 30, 2008, up slightly from 49,996,277 shares as of June 30, 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 5:00 p.m. Eastern Time / 2:00 p.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.

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 8:00 p.m. Pacific Time on October 20, 2008 through midnight on October 24, 2008. To listen to a replay, call (719) 457-0820, access code 4207224.

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, with more than eight million subscribers. For one low monthly price, Netflix members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs, all in unlimited amounts. Members can choose from over 100,000 DVD titles and a growing library of more than 12,000 choices that can be watched instantly. There are never any due dates or late fees. DVDs are delivered free to members by first class mail, with a postage-paid return envelope, from 55 distribution centers. More than 95 percent of Netflix members live in areas that generally receive shipments in one business day. Netflix is also partnering with leading consumer electronics companies to offer a range of devices that can instantly stream movies and TV episodes to members' TVs from Netflix. 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 fourth 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, especially in the current uncertain economic environment; 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 deterioration of 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; changes 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; 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.

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 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 Nine Months Ended
September June September September September
30, 30, 30, 30, 30,
2008 2008 2007** 2008 2007**

Revenues $341,269 $337,614 $293,972 $1,005,066 $902,985
Cost of revenues:
Subscription 186,573 193,769 163,707 567,498 495,734
Fulfillment
expenses * 37,923 36,318 30,746 109,890 90,384
Total cost of
revenues 224,496 230,087 194,453 677,388 586,118
Gross profit 116,773 107,527 99,519 327,678 316,867
Operating expenses:
Technology and
development * 23,368 22,186 18,112 65,821 52,526
Marketing * 49,217 39,984 49,149 144,096 166,508
General and
administrative * 11,742 13,419 12,863 38,900 38,834
Gain on disposal of
DVDs (1,628) (2,263) (2,310) (4,724) (5,500)
Gain on legal
settlement - - - - (7,000)
Total operating
expenses 82,699 73,326 77,814 244,093 245,368
Operating income 34,074 34,201 21,705 83,585 71,499
Other income
(expense):
Interest expense on
lease financing
obligations (677) (681) (296) (1,781) (893)
Interest and other
income (expense) 1,536 2,404 5,089 11,600 15,411
Income before income
taxes 34,933 35,924 26,498 93,404 86,017
Provision for income
taxes 14,562 9,345 10,851 33,110 35,100
Net income $20,371 $26,579 $15,647 $60,294 $50,917
Net income per share:
Basic $0.34 $0.43 $0.24 $0.98 $0.75
Diluted $0.33 $0.42 $0.23 $0.95 $0.73
Weighted average
common shares
outstanding:
Basic 60,408 61,782 66,469 61,651 67,723
Diluted 62,272 63,857 68,090 63,658 69,560

* Stock-based
compensation included
in expense line items:
Fulfillment expenses $126 $108 $99 $340 $327
Technology and
development 950 849 1,002 2,795 2,590
Marketing 460 455 547 1,424 1,599
General and
administrative 1,499 1,493 1,465 4,511 4,218

Reconciliation of
Non-GAAP Financial
Measures
(unaudited)
Non-GAAP net income
reconciliation:
GAAP net income $20,371 $26,579 $15,647 $60,294 $50,917
Stock-based
compensation 3,035 2,905 3,113 9,070 8,734
Income tax effect of
stock-based
compensation (1,266) (755) (1,276) (3,298) (3,560)
Non-GAAP net income $22,140 $28,729 $17,484 $66,066 $56,091
Non-GAAP net income
per share:
Basic $0.37 $0.47 $0.26 $1.07 $0.83
Diluted $0.36 $0.45 $0.26 $1.04 $0.81
Weighted average
common shares
outstanding:
Basic 60,408 61,782 66,469 61,651 67,723
Diluted 62,272 63,857 68,090 63,658 69,560

** Certain amounts have been corrected for the change in the accounting
for two of our building leases.

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
As of
September 30, December 31,
2008 2007
Assets
Current assets:
Cash and cash equivalents $111,524 $177,439
Short-term investments 139,304 207,703
Prepaid expenses 9,982 6,116
Prepaid revenue sharing expenses 15,274 6,983
Deferred tax assets 7,023 2,254
Other current assets 18,268 16,037
Total current assets 301,375 416,532
Content library, net 122,558 132,455
Property and equipment, net 128,541 113,175
Deferred tax assets 19,831 16,865
Other assets 10,694 4,465
Total assets $582,999 $683,492

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $109,277 $104,445
Accrued expenses 31,625 36,466
Current portion lease financing obligations 1,090 823
Deferred revenue 65,897 71,665
Total current liabilities 207,889 213,399
Lease financing obligations,
excluding current portion 38,287 35,652
Other liabilities 11,990 4,629
Total liabilities 258,166 253,680
Stockholders' equity:
Common stock, $0.001 par value; 160,000,000
shares authorized at September 30, 2008 and
December 31, 2007; 59,119,998 and 64,912,915
issued and outstanding at September 30, 2008
and December 31, 2007, respectively 62 65
Additional paid-in capital 331,489 402,710
Treasury stock at cost (2,991,684 shares) (90,028) -
Accumulated other comprehensive
(loss) income (2,410) 1,611
Retained earnings 85,720 25,426
Total stockholders' equity 324,833 429,812
Total liabilities and
stockholders' equity $582,999 $683,492

Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September June September September September
30, 30, 30, 30, 30,
2008 2008 2007* 2008 2007*
Cash flows from
operating activities:
Net income $20,371 $26,579 $15,647 $60,294 $50,917
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization of
property, equipment
and intangibles 8,643 8,188 5,945 23,313 16,057
Amortization of
content library 47,596 57,012 48,237 162,178 148,664
Amortization of
discounts and
premiums on
investments 122 177 23 436 (48)
Stock-based
compensation expense 3,035 2,905 3,113 9,070 8,734
Excess tax benefits
from stock-based
compensation (1,093) (2,554) (5,170) (4,467) (21,264)
Gain (loss) on
disposal of property
and equipment (1) - 128 101 128
Gain (loss) on sale
of short-term
investments 494 78 (170) (3,746) (364)
Gain on disposal of
DVDs (3,205) (4,059) (3,937) (9,856) (11,731)
Deferred taxes (3,894) (2,502) (358) (7,255) (1,235)
Changes in operating
assets and
liabilities:
Prepaid expenses and
other current
assets (209) (10,659) 111 (8,306) (4,495)
Accounts payable (1,056) 9,124 6,048 6,869 (387)
Accrued expenses 4,730 (14,551) 11,433 (1,994) 33,376
Deferred revenue (1,989) (489) (4,201) (5,768) (13,357)
Other assets and
liabilities (313) 8,896 814 8,376 1,026
Net cash provided
by operating
activities 73,231 78,145 77,663 229,245 206,021
Cash flows from
investing activities:
Purchases of short-term
investments (22,950) (65,937) (51,972) (180,841) (370,112)
Proceeds from sale of
short-term investments 50,609 21,682 41,264 247,610 165,379
Purchases of property
and equipment (9,226) (14,662) (7,412) (36,319) (34,393)
Acquisition of
intangible asset (62) (1,000) - (1,062) -
Acquisitions of content
library (41,564) (55,175) (39,452) (161,862) (165,346)
Proceeds from sale of
DVDs 3,787 5,379 4,760 13,673 17,756
Investment in business - - - (6,000) -
Other assets 3 20 615 31 779
Net cash used in
investing
activities (19,403) (109,693) (52,197) (124,770) (385,937)
Cash flows from
financing activities:
Principal payments of
lease financing
obligations (234) (230) (98) (586) (290)
Proceeds from issuance
of common stock 2,576 4,524 417 15,642 3,864
Excess tax benefits
from stock-based
compensation 1,093 2,554 5,170 4,467 21,264
Repurchases of common
stock (90,028) - (35,333) (189,913) (65,548)
Net cash (used in)
provided by
financing
activities (86,593) 6,848 (29,844) (170,390) (40,710)
Net decrease in cash
and cash equivalents (32,765) (24,700) (4,378) (65,915) (220,626)
Cash and cash
equivalents, beginning
of period 144,289 168,989 184,182 177,439 400,430
Cash and cash
equivalents, end of
period $111,524 $144,289 $179,804 $111,524 $179,804

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $73,231 $78,145 $77,663 $229,245 $206,021
Purchases of property
and equipment (9,226) (14,662) (7,412) (36,319) (34,393)
Acquisition of
intangible asset (62) (1,000) - (1,062) -
Acquisitions of content
library (41,564) (55,175) (39,452) (161,862) (165,346)
Proceeds from sale of
DVDs 3,787 5,379 4,760 13,673 17,756
Other assets 3 20 615 31 779
Non-GAAP free cash flow $26,169 $12,707 $36,174 $43,706 $24,817

* Certain amounts have been corrected for the change in the accounting for
two of our building leases.

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
September 30, June 30, September 30,
2008 2008 2007*
Subscriber information:
Subscribers: beginning of period 8,411 8,243 6,742
Gross subscriber additions: during
period 1,528 1,384 1,297
Gross subscriber additions year-
to-year change 17.8% 34.6% (1.0%)
Gross subscriber additions
quarter-to-quarter sequential
change 10.4% (25.7%) 26.2%
Less subscriber cancellations:
during period (1,267) (1,216) (1,011)
Subscribers: end of period 8,672 8,411 7,028
Subscribers year-to-year change 23.4% 24.8% 24.1%
Subscribers quarter-to-quarter
sequential change 3.1% 2.0% 4.2%
Free subscribers: end of period 182 176 183
Free subscribers as percentage of
ending subscribers 2.1% 2.1% 2.6%
Paid subscribers: end of period 8,490 8,235 6,845
Paid subscribers year-to-year
change 24.0% 24.6% 24.7%
Paid subscribers quarter-to-
quarter sequential change 3.1% 1.6% 3.6%
Average monthly revenue per paying
subscriber $13.60 $13.78 $14.57
Churn 4.2% 4.2% 4.2%
Subscriber acquisition cost $32.21 $28.89 $37.89
Margins:
Gross margin 34.2% 31.8% 33.9%
Operating margin 10.0% 10.1% 7.4%
Net margin 6.0% 7.9% 5.3%
Expenses as percentage of revenues:
Technology and development 6.8% 6.6% 6.2%
Marketing 14.4% 11.8% 16.7%
General and administrative 3.4% 4.0% 4.4%
Gain on disposal of DVDs (0.4%) (0.7%) (0.8%)
Total operating expenses 24.2% 21.7% 26.5%
Year-to-year change:
Total revenues 16.1% 11.2% 14.9%
Fulfillment expenses 23.3% 21.6% 30.4%
Technology and development 29.0% 18.0% 53.1%
Marketing 0.1% (11.6%) (17.2%)
General and administrative (8.7%) (2.9%) 29.7%
Gain on disposal of DVDs (29.5%) (0.8%) 102.3%
Total operating expenses 6.3% 6.9% (2.7%)

* Certain amounts have been corrected for the change in the accounting for
two of our building leases.

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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