Netflix Announces Q4 2008 Financial Results

Netflix Announces Q4 2008 Financial Results

Subscribers - 9.4 million

Revenue - $359.6 million

GAAP Net Income - $22.7 million

GAAP EPS - $0.38 per diluted share

LOS GATOS, Calif., Jan. 26 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the fourth quarter and year ended December 31, 2008.

"Consumers embraced the Netflix experience in near record numbers last quarter," said Reed Hastings, Netflix co-founder and chief executive officer, "with growth in our core DVD offering and growing momentum with internet streaming."

Fourth-Quarter and Fiscal-Year 2008 Financial Highlights

Subscribers. Netflix ended the fourth quarter of 2008 with approximately 9,390,000 total subscribers, representing 26 percent year-over-year growth from 7,479,000 total subscribers at the end of the fourth quarter of 2007 and 8 percent sequential growth from 8,672,000 subscribers at the end of the third quarter of 2008.

Net subscriber change in the quarter was an increase of 718,000 compared to an increase of 451,000 for the same period of 2007 and an increase of 261,000 for the third quarter of 2008.

Gross subscriber additions for the quarter totaled 2,085,000, representing 39 percent year-over-year growth from 1,495,000 gross subscriber additions in the fourth quarter of 2007 and 36 percent quarter-over-quarter growth from 1,528,000 gross subscriber additions in the third quarter of 2008.

Of the 9,390,000 total subscribers at quarter end, 98 percent, or 9,164,000, were paid subscribers. The other 2 percent, or 226,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the fourth quarter of 2007 and at the end of the third quarter of 2008.

Revenue for the fourth quarter of 2008 was $359.6 million, representing 19 percent year-over-year growth from $302.4 million for the fourth quarter of 2007, and a 5 percent sequential increase from $341.3 million for the third quarter of 2008. Revenue for fiscal 2008 was $1.365 billion, up 13 percent from $1.205 billion for fiscal 2007.

Gross margin(1) for the fourth quarter of 2008 was 35.2 percent compared to 33.8 percent for the fourth quarter of 2007 and 34.2 percent for the third quarter of 2008. Gross margin for fiscal 2008 was 33.3 percent compared to 34.8 percent for fiscal 2007.

GAAP net income for the fourth quarter of 2008 was $22.7 million, or $0.38 per diluted share compared to GAAP net income of $15.7 million, or $0.23 per diluted share, for the fourth quarter of 2007 and GAAP net income of $20.4 million, or $0.33 per diluted share, for the third quarter of 2008. GAAP net income grew 45 percent on a year-over-year basis and GAAP EPS grew 65 percent on a year-over-year basis.

GAAP net income for fiscal 2008 was $83.0 million, or $1.32 per diluted share compared to GAAP net income of $66.6 million, or $0.97 per diluted share, for fiscal 2007. GAAP net income grew 25 percent on a year-over-year basis and GAAP EPS grew 36 percent on a year-over-year basis.

Non-GAAP net income was $24.6 million, or $0.41 per diluted share, for the fourth quarter of 2008 compared to non-GAAP net income of $17.7 million, or $0.26 per diluted share, for the fourth quarter of 2007 and non-GAAP net income of $22.1 million, or $0.36 per diluted share, for the third quarter of 2008. Non-GAAP net income grew 39 percent on a year-over-year basis and non-GAAP EPS grew 58 percent on a year-over-year basis.

Non-GAAP net income was $90.7 million, or $1.44 per diluted share, for fiscal 2008 compared to non-GAAP net income of $73.8 million, or $1.07 per diluted share, for fiscal 2007. Non-GAAP net income grew 23 percent on a year-over-year basis and non-GAAP EPS grew 35 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 was $3.2 million for the fourth quarter of 2008 and the fourth quarter of 2007 and $3.0 million for the third quarter of 2008. Stock-based compensation for fiscal 2008 was $12.3 million compared to $12.0 million for fiscal 2007. 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 fourth quarter of 2008 was $26.67 per gross subscriber addition compared to $34.58 for the same period of 2007 and $32.21 for the third quarter of 2008. SAC for fiscal 2008 was $29.12 per gross subscriber addition compared to $40.86 for fiscal 2007.

Churn(3) for the fourth quarter of 2008 was 4.2 percent compared to 4.1 percent for the fourth quarter of 2007 and 4.2 percent for the third 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 fourth quarter of 2008 was $51.0 million compared to $21.1 million in the fourth quarter of 2007 and $26.2 million for the third quarter of 2008. Free cash flow for fiscal 2008 was $94.7 million compared to $45.9 million in fiscal 2007.

(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.

Cash provided by operating activities for the fourth quarter of 2008 was $92.1 million compared to $87.6 million for the fourth quarter of 2007 and $60.5 million for the third quarter of 2008. Cash provided by operating activities for fiscal 2008 was $284.0 million compared to $277.4 million for fiscal 2007.

Stock Buyback

The Company also is announcing today that its Board of Directors has authorized a stock repurchase program for 2009. Based on the Board's authorization, the Company anticipates a repurchase program of up to $175 million.

Stock repurchases under this program may be made through open market transactions and, from time to time, privately negotiated transactions with third parties, and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. Repurchased shares would be returned to the status of authorized but un-issued shares of common stock.

Business Outlook

The Company's performance expectations for the first quarter of 2009 and full-year 2009 are as follows:

First-Quarter 2009

-- Ending subscribers of 10.1 million to 10.3 million
-- Revenue of $387 million to $393 million
-- GAAP net income of $15 million to $20 million
-- GAAP EPS of $0.25 to $0.33 per diluted share

Full-Year 2009

-- Ending subscribers of 10.6 million to 11.3 million
-- Revenue of $1.58 billion to $1.635 billion
-- GAAP net income of $88 million to $98 million
-- GAAP EPS of $1.43 to $1.59 per diluted share

Float and Trading Plans

The Company estimates the public float at approximately 50,150,991 shares as of December 31, 2008, up slightly from 50,148,071 shares as of September 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 5:00 p.m. Pacific Time on January 26, 2009 through midnight on January 29, 2009. To listen to a replay, call (719) 457-0820, access code 8834367.

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 nine 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 more than 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 first quarter of 2009 and the full-year 2009 as well as the anticipated size of our 2009 stock repurchase program. 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 and postal rate increases; 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; competition and widespread consumer adoption of different modes of viewing in-home filmed entertainment and, with respect to the stock repurchase program, changes in cash flows, cash balances, economic and market conditions, stock price and additional Board action. 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 Twelve Months Ended
December September December December December
31, 30, 31, 31, 31,
2008 2008 2007 2008 2007

Revenues $359,595 $341,269 $302,355 $1,364,661 $1,205,340
Cost of revenues:
Subscription 193,635 186,573 168,673 761,133 664,407
Fulfillment
expenses * 39,211 37,923 31,377 149,101 121,761
Total cost of
revenues 232,846 224,496 200,050 910,234 786,168
Gross profit 126,749 116,773 102,305 454,427 419,172
Operating expenses:
Technology and
development * 24,052 23,368 18,453 89,873 70,979
Marketing * 55,617 49,217 51,704 199,713 218,212
General and
administrative * 10,762 11,742 13,570 49,662 52,404
Gain on disposal
of DVDs (1,603) (1,628) (1,696) (6,327) (7,196)
Gain on legal
settlement -- -- -- -- (7,000)
Total operating
expenses 88,828 82,699 82,031 332,921 327,399
Operating income 37,921 34,074 20,274 121,506 91,773
Other income
(expense):
Interest expense
on lease financing
obligations (677) (677) (295) (2,458) (1,188)
Interest and other
income (expense) 852 1,536 4,929 12,452 20,340
Income before income
taxes 38,096 34,933 24,908 131,500 110,925
Provision for income
taxes 15,364 14,562 9,217 48,474 44,317
Net income $22,732 $20,371 $15,691 $83,026 $66,608
Net income per
share:
Basic $0.39 $0.34 $0.24 $1.36 $0.99
Diluted $0.38 $0.33 $0.23 $1.32 $0.97
Weighted average
common shares
outstanding:
Basic 58,906 60,408 65,156 60,961 67,076
Diluted 60,311 62,272 67,042 62,836 68,902

* Stock-based
compensation
included in
expense line items:
Fulfillment expenses $126 $126 $100 $466 $427
Technology and
development 1,095 950 1,105 3,890 3,695
Marketing 462 460 561 1,886 2,160
General and
administrative 1,511 1,499 1,476 6,022 5,694

Reconciliation of
Non-GAAP Financial
Measures (unaudited)
Non-GAAP net income
reconciliation:
GAAP net income $22,732 $20,371 $15,691 $83,026 $66,608
Stock-based
compensation 3,194 3,035 3,242 12,264 11,976
Income tax effect
of stock-based
compensation (1,287) (1,266) (1,200) (4,585) (4,760)
Non-GAAP net income $24,639 $22,140 $17,733 $90,705 $73,824
Non-GAAP net income
per share:
Basic $0.42 $0.37 $0.27 $1.49 $1.10
Diluted $0.41 $0.36 $0.26 $1.44 $1.07
Weighted average
common shares
outstanding:
Basic 58,906 60,408 65,156 60,961 67,076
Diluted 60,311 62,272 67,042 62,836 68,902

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
As of
December 31, December 31,
2008 2007*
Assets
Current assets:
Cash and cash equivalents $139,881 $177,439
Short-term investments 157,390 207,703
Prepaid expenses 8,122 6,116
Prepaid revenue sharing expenses 18,417 6,983
Current content library, net 18,691 16,301
Deferred tax assets 5,617 2,254
Other current assets 13,329 15,627
Total current assets 361,447 432,423
Content library, net 98,547 112,070
Property and equipment, net 124,948 113,175
Deferred tax assets 22,409 16,865
Other assets 10,595 4,465
Total assets $617,946 $678,998
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $100,344 $99,951
Accrued expenses 31,394 36,466
Current portion lease financing obligations 1,152 823
Deferred revenue 83,127 71,665
Total current liabilities 216,017 208,905
Lease financing obligations, excluding
current portion 37,988 35,652
Other liabilities 16,786 4,629
Total liabilities 270,791 249,186
Stockholders' equity:
Common stock, $0.001 par value; 160,000,000
shares authorized at December 31, 2008 and
December 31, 2007; 58,862,478 and
64,912,915 issued and outstanding at
December 31, 2008 and December 31, 2007,
respectively 62 65
Additional paid-in capital 338,577 402,710
Treasury stock at cost (3,491,084 shares) (100,020) --
Accumulated other comprehensive income 84 1,611
Retained earnings 108,452 25,426
Total stockholders' equity 347,155 429,812
Total liabilities and stockholders' equity $617,946 $678,998

* Certain amounts have been reclassified for the change in the accounting
for the streaming content portion of our content library.

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,
2008 2008* 2007* 2008 2007*
Cash flows from
operating activities:
Net income $22,732 $20,371 $15,691 $83,026 $66,608
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization of
property, equipment
and intangibles 9,141 8,643 6,162 32,454 22,219
Amortization of
content library 47,579 47,596 54,751 209,757 203,415
Amortization of
discounts and
premiums on
investments 185 122 72 623 24
Stock-based
compensation expense 3,193 3,035 3,242 12,263 11,976
Excess tax benefits
from stock-based
compensation (753) (1,093) (4,984) (5,220) (26,248)
Loss (gain) on
disposal of property
and equipment -- (1) 14 101 142
Loss (gain) on sale
of short-term
investments 618 494 (323) (3,130) (687)
Gain on disposal of
DVDs (3,494) (3,205) (2,906) (13,350) (14,637)
Deferred taxes (1,172) (3,894) 342 (8,427) (893)
Changes in operating
assets and
liabilities:
Prepaid expenses and
other current assets 11,038 (7,022) (816) (4,181) (3,893)
Content library (11,123) (5,773) (15,348) (48,290) (34,821)
Accounts payable (7,917) (744) 15,091 7,111 16,555
Accrued expenses 171 4,730 (567) (1,823) 32,809
Deferred revenue 17,232 (1,989) 15,344 11,464 1,987
Other assets and
liabilities 4,670 (775) 1,842 11,659 2,868
Net cash provided
by operating
activities 92,100 60,495 87,607 284,037 277,424
Cash flows from
investing activities:
Purchases of short-term
investments (76,118) (22,950) (35,228) (256,959) (405,340)
Proceeds from sale of
short-term investments 59,723 50,609 35,453 307,333 200,832
Purchases of property
and equipment (7,471) (9,226) (9,863) (43,790) (44,256)
Acquisition of
intangible asset -- (62) (550) (1,062) (550)
Acquisitions of content
library (38,295) (28,828) (59,505) (162,849) (208,647)
Proceeds from sale of
DVDs 4,695 3,787 3,884 18,368 21,640
Investment in business -- -- -- (6,000) --
Other assets (32) 3 (482) (1) 297
Net cash used in
investing
activities (57,498) (6,667) (66,291) (144,960) (436,024)
Cash flows from
financing activities:
Principal payments of
lease financing
obligations (237) (234) (100) (823) (390)
Proceeds from issuance
of common stock 3,231 2,576 5,745 18,873 9,611
Excess tax benefits
from stock-based
compensation 753 1,093 4,984 5,220 26,248
Repurchases of common
stock (9,992) (90,028) (34,310) (199,905) (99,860)
Net cash used in
financing
activities (6,245) (86,593) (23,681) (176,635) (64,391)
Net increase (decrease)
in cash and cash
equivalents 28,357 (32,765) (2,365) (37,558) (222,991)
Cash and cash
equivalents, beginning
of period 111,524 144,289 179,804 177,439 400,430
Cash and cash
equivalents, end of
period $139,881 $111,524 $177,439 $139,881 $177,439

Non-GAAP free cash flow
reconciliation:
Net cash provided by
operating activities $92,100 $60,495 $87,607 $284,037 $277,424
Purchases of property
and equipment (7,471) (9,226) (9,863) (43,790) (44,256)
Acquisition of
intangible asset -- (62) (550) (1,062) (550)
Acquisitions of content
library (38,295) (28,828) (59,505) (162,849) (208,647)
Proceeds from sale of
DVDs 4,695 3,787 3,884 18,368 21,640
Other assets (32) 3 (482) (1) 297
Non-GAAP free cash flow $50,997 $26,169 $21,091 $94,703 $45,908

* Certain amounts have been reclassified for the change in the accounting
for the streaming content portion of our content library.

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, 2008 30, 2008 31, 2007

Subscriber information:
Subscribers: beginning of period 8,672 8,411 7,028
Gross subscriber additions: during
period 2,085 1,528 1,495
Gross subscriber additions
year-to-year change 39.5% 17.8% 0.1%
Gross subscriber additions
quarter-to-quarter sequential
change 36.5% 10.4% 15.3%
Less subscriber cancellations:
during period (1,367) (1,267) (1,044)
Subscribers: end of period 9,390 8,672 7,479
Subscribers year-to-year change 25.6% 23.4% 18.4%
Subscribers quarter-to-quarter
sequential change 8.3% 3.1% 6.4%
Free subscribers: end of period 226 182 153
Free subscribers as percentage of
ending subscribers 2.4% 2.1% 2.0%
Paid subscribers: end of period 9,164 8,490 7,326
Paid subscribers year-to-year change 25.1% 24.0% 19.0%
Paid subscribers quarter-to-quarter
sequential change 7.9% 3.1% 7.0%
Average monthly revenue per paying
subscriber $13.58 $13.60 $14.22
Churn 4.2% 4.2% 4.1%
Subscriber acquisition cost $26.67 $32.21 $34.58
Margins:
Gross margin 35.2% 34.2% 33.8%
Operating margin 10.5% 10.0% 6.7%
Net margin 6.3% 6.0% 5.2%
Expenses as percentage of revenues:
Technology and development 6.7% 6.8% 6.1%
Marketing 15.5% 14.4% 17.1%
General and administrative 3.0% 3.4% 4.5%
Gain on disposal of DVDs (0.5%) (0.4%) (0.5%)
Total operating expenses 24.7% 24.2% 27.2%
Year-to-year change:
Total revenues 18.9% 16.1% 9.1%
Fulfillment expenses 25.0% 23.3% 17.2%
Technology and development 30.3% 29.0% 40.9%
Marketing 7.6% 0.1% (21.8%)
General and administrative (20.7%) (8.7%) 22.1%
Gain on disposal of DVDs (5.5%) (29.5%) 30.1%
Total operating expenses 8.3% 6.3% (7.9%)

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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