Netflix Announces Q2 2009 Financial Results

Netflix Announces Q2 2009 Financial Results

Subscribers - 10.6 million Revenue - $408.5 million GAAP Net Income - $32.4 million GAAP EPS - $0.54 per diluted share

LOS GATOS, Calif., July 23 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2009.

"We continued to execute very well in the second quarter and are on track to deliver a record 2009," said Reed Hastings, Netflix co-founder and chief executive officer. "As our subscriber base and disc shipments continue to expand, and as we offer more opportunities to watch instantly via the Internet, we believe we are striking the right balance between growth, investment and earnings."

Second-Quarter 2009 Financial Highlights

Subscribers. Netflix ended the second quarter of 2009 with approximately 10,599,000 total subscribers, representing 26 percent year-over-year growth from 8,411,000 total subscribers at the end of the second quarter of 2008 and 3 percent sequential growth from 10,310,000 subscribers at the end of the first quarter of 2009.

Net subscriber change in the quarter was an increase of 289,000 compared to an increase of 168,000 for the same period of 2008 and an increase of 920,000 for the first quarter of 2009.

Gross subscriber additions for the quarter totaled 1,936,000, representing 40 percent year-over-year growth from 1,384,000 gross subscriber additions in the second quarter of 2008 and 20 percent quarter-over-quarter decline from 2,413,000 gross subscriber additions in the first quarter of 2009.

Of the 10,599,000 total subscribers at quarter end, 98 percent, or 10,375,000, were paid subscribers. The other 2 percent, or 224,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2008 and at the end of the first quarter of 2009.

Revenue for the second quarter of 2009 was $408.5 million, representing 21 percent year-over-year growth from $337.6 million for the second quarter of 2008, and a 4 percent sequential increase from $394.1 million for the first quarter of 2009.

Gross margin(1) for the second quarter of 2009 was 34.1 percent compared to 31.8 percent for the second quarter of 2008 and 34.2 percent for the first quarter of 2009.

GAAP net income for the second quarter of 2009 was $32.4 million, or $0.54 per diluted share compared to GAAP net income of $26.6 million, or $0.42 per diluted share, for the second quarter of 2008 and GAAP net income of $22.4 million, or $0.37 per diluted share, for the first quarter of 2009. GAAP net income grew 22 percent on a year-over-year basis and GAAP EPS grew 29 percent on a year-over-year basis.

Non-GAAP net income was $34.4 million, or $0.58 per diluted share, for the second quarter of 2009 compared to non-GAAP net income of $28.7 million, or $0.45 per diluted share, for the second quarter of 2008 and non-GAAP net income of $24.2 million, or $0.40 per diluted share, for the first quarter of 2009. Non-GAAP net income grew 20 percent on a year-over-year basis and non-GAAP EPS grew 29 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 $3.3 million for the second quarter of 2009, compared to $2.9 million for the second quarter of 2008 and $3.1 million for the first quarter of 2009. 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 2009 was $23.88 per gross subscriber addition compared to $28.89 for the same period of 2008 and $25.79 for the first quarter of 2009.

Churn(3) for the second quarter of 2009 was 4.5 percent compared to 4.2 percent for the second quarter of 2008 and for the first quarter of 2009. 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 2009 was $26.3 million compared to $12.7 million in the second quarter of 2008 and $15.1 million for the first quarter of 2009.

Cash provided by operating activities for the second quarter of 2009 was $75.3 million compared to $67.4 million for the second quarter of 2008 and $65.6 million for the first quarter of 2009.

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.

Business Outlook

The Company's performance expectations for the third and fourth quarters of 2009 and full-year 2009 are as follows:

Third-Quarter 2009
-- Ending subscribers of 10.9 million to 11.1 million
-- Revenue of $416 million to $422 million
-- GAAP net income of $23 million to $28 million

-- GAAP EPS of $0.39 to $0.47 per diluted share

Fourth-Quarter 2009
-- Ending subscribers of 11.6 million to 12 million
-- Revenue of $431 million to $445 million
-- GAAP net income of $21 million to $26 million

-- GAAP EPS of $0.36 to $0.44 per diluted share

Full-Year 2009
-- Ending subscribers of 11.6 million to 12 million, up from 11.2 million
to 11.8 million
-- Revenue of $1.65 billion to $1.67 billion, up from $1.63 billion to
$1.67 billion
-- GAAP net income of $99 million to $109 million, up from $96 million to
$106 million

-- GAAP EPS of $1.65 to $1.82 per diluted share, up from $1.56 to $1.72
per diluted share

Earnings Call

The Netflix earnings call will be webcast today at 6:00 p.m. Eastern Time / 3:00 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 6:00 p.m. Pacific Time on July 23, 2009 through midnight on July 27, 2009. To listen to a replay, call (719) 457-0820, access code 4688984.

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 ten 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 58 distribution centers. More than 97 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 third and fourth quarters of 2009 and the full-year 2009. 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 continued availability of content on terms and conditions acceptable to us; 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; consumer 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. 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 25, 2009. 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,
2009 2009 2008 2009 2008
---- ---- ---- ---- ----

Revenues $408,509 $394,098 $337,614 $802,607 $663,797
Cost of revenues:
Subscription 224,858 215,299 193,769 440,157 380,925
Fulfillment expenses * 44,385 43,969 36,318 88,354 71,967
------ ------ ------ ------ ------
Total cost of
revenues 269,243 259,268 230,087 528,511 452,892
------- ------- ------- ------- -------
Gross profit 139,266 134,830 107,527 274,096 210,905
Operating expenses:
Technology and
development * 27,119 24,200 22,186 51,319 42,453
Marketing * 46,231 62,242 39,984 108,473 94,879
General and
administrative * 13,252 13,014 13,419 26,266 27,158
Gain on disposal
of DVDs (118) (1,097) (2,263) (1,215) (3,096)
---- ------ ------ ------ ------
Total operating
expenses 86,484 98,359 73,326 184,843 161,394
------ ------ ------ ------- -------
Operating income 52,782 36,471 34,201 89,253 49,511
Other income (expense):
Interest expense on
lease financing
obligations (674) (670) (681) (1,344) (1,104)
Interest and other
Income (expense) 866 1,610 2,404 2,476 10,064
--- ----- ----- ----- ------
Income before income
taxes 52,974 37,411 35,924 90,385 58,471
Provision for income
taxes 20,531 15,048 9,345 35,579 18,548
------ ------ ----- ------ ------
Net income $32,443 $22,363 $26,579 $54,806 $39,923
======= ======= ======= ======= =======
Net income per share:
Basic $0.56 $0.38 $0.43 $0.94 $0.64
Diluted $0.54 $0.37 $0.42 $0.91 $0.62
Weighted average common
shares outstanding:
Basic 57,872 58,734 61,782 58,301 62,262
Diluted 59,660 60,709 63,857 60,182 64,341

*Stock-based compensation
included in expense
line items:
Fulfillment expenses $102 $120 $108 $222 $214
Technology and
development 1,190 1,071 849 2,261 1,845
Marketing 458 443 455 901 964
General and
administrative 1,528 1,498 1,493 3,026 3,012

Reconciliation of
Non-GAAP Financial
Measures
(unaudited)
Non-GAAP net
income reconciliation:
GAAP net income $32,443 $22,363 $26,579 $54,806 $39,923
Stock-based
compensation 3,278 3,132 2,905 6,410 6,035
Income tax effect
of stock-based
compensation (1,272) (1,259) (755) (2,531) (2,032)
------ ------ ---- ------ ------
Non-GAAP net income $34,449 $24,236 $28,729 $58,685 $43,926
======= ======= ======= ======= =======
Non-GAAP net income
per share:
Basic $0.60 $0.41 $0.47 $1.01 $0.71
Diluted $0.58 $0.40 $0.45 $0.98 $0.68
Weighted average common
shares outstanding:
Basic 57,872 58,734 61,782 58,301 62,262
Diluted 59,660 60,709 63,857 60,182 64,341

Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
As of
------
June 30, December 31,
2009 2008
---- ----
Assets
Current assets:
Cash and cash equivalents $87,471 $139,881
Short-term investments 167,498 157,390
Prepaid expenses 11,430 8,122
Prepaid revenue sharing expenses 14,671 18,417
Current content library, net 33,519 18,691
Deferred tax assets 5,594 5,617
Other current assets 22,381 13,329
------ ------
Total current assets 342,564 361,447
Content library, net 100,316 98,547
Property and equipment, net 120,346 124,948
Deferred tax assets 17,225 22,409
Other assets 11,542 10,595
------ ------
Total assets $591,993 $617,946
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $101,634 $100,344
Accrued expenses 27,782 31,394
Current portion of lease financing obligations 1,275 1,152
Deferred revenue 80,495 83,127
------ ------
Total current liabilities 211,186 216,017
Lease financing obligations, excluding current
portion 37,301 37,988
Other liabilities 19,135 16,786
------ ------
Total liabilities 267,622 270,791
Stockholders' equity:
Common stock, $0.001 par value; 160,000,000 shares
authorized at June 30, 2009 and December 31, 2008;
57,415,726 and 58,862,478 issued and outstanding at
June 30, 2009 and December 31, 2008, respectively 64 62
Additional paid-in capital 375,574 338,577
Treasury stock at cost (6,295,073 and 3,491,084
shares at June 30, 2009 and December 31, 2008,
respectively) (215,250) (100,020)
Accumulated other comprehensive income 725 84
Retained earnings 163,258 108,452
------- -------
Total stockholders' equity 324,371 347,155
------- -------
Total liabilities and stockholders'
equity $591,993 $617,946
======== ========

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,
2009 2009 2008 2009 2008
---- ---- ---- ---- ----
Cash flows from
operating activities:
Net income $32,443 $22,363 $26,579 $54,806 $39,923
Adjustments to
reconcile net
income to net
cash provided
by operating
activities:
Depreciation
and
amortization
of property,
equipment
and intangibles 9,013 9,175 8,188 18,188 14,772
Amortization of
content library 53,235 49,304 57,012 102,539 114,582
Amortization of
discounts and
premiums on
investments 119 194 177 313 316
Stock-based
compensation
expense 3,278 3,132 2,905 6,410 6,035
Excess tax
benefits from
stock-based
compensation (3,815) (3,684) (2,554) (7,499) (3,374)
Loss on disposal
of property
and equipment 110 144 - 254 -
Loss (gain) on
sale of
short-term
investments 101 (572) 78 (471) (4,242)
Gain on disposal
of DVDs (506) (2,033) (4,059) (2,539) (6,651)
Deferred taxes 5,404 (623) (2,502) 4,781 (3,361)
Changes in
operating
assets and
liabilities:
Prepaid expenses
and other
current assets (8,845) (391) (10,947) (9,236) (8,197)
Content library (9,343) (22,091) (7,982) (31,434) (31,394)
Accounts
payable (6,549) 8,572 7,092 2,023 15,772
Accrued expenses (234) 4,331 (14,551) 4,097 (6,724)
Deferred revenue (128) (2,504) (489) (2,632) (3,779)
Other assets and
liabilities 1,019 316 8,433 1,335 7,764
----- --- ----- ----- -----
Net cash
provided by
operating
activities 75,302 65,633 67,380 140,935 131,442
------ ------ ------ ------- -------
Cash flows from
investing activities:
Purchases of
short-term
investments (28,769) (52,384) (65,937) (81,153) (157,891)
Proceeds from sale
of short-term
investments 7,832 36,933 21,017 44,765 195,436
Proceeds from
maturities of
short-term
investments 26,175 1,330 665 27,505 1,565
Purchases of
property and
equipment (6,933) (6,572) (14,662) (13,505) (27,093)
Acquisitions of
intangible asset - (200) (1,000) (200) (1,000)
Acquisitions of content
library (43,224) (46,499) (44,410) (89,723) (95,726)
Proceeds from sale
of DVDs 1,159 2,726 5,379 3,885 9,886
Investment in business - - - - (6,000)
Other assets 11 (2) 20 9 28
-- -- -- -- --
Net cash used
in investing
activities (43,749) (64,668) (98,928) (108,417) (80,795)
------- ------- ------- -------- -------
Cash flows from
financing activities:
Principal payments
of lease financing
obligations (295) (269) (230) (564) (352)
Proceeds from
issuance of common
stock 9,778 13,589 4,524 23,367 13,066
Excess tax benefits
from stock-based
compensation 3,815 3,684 2,554 7,499 3,374
Repurchases of common
stock (72,511) (42,719) - (115,230) (99,885)
------- ------- -- -------- -------
Net cash
(used in)
provided
by financing
activities (59,213) (25,715) 6,848 (84,928) (83,797)
------- ------- ----- ------- -------
Net decrease in cash
and cash equivalents (27,660) (24,750) (24,700) (52,410) (33,150)
Cash and cash
equivalents,
beginning of
period 115,131 139,881 168,989 139,881 177,439
------- ------- ------- ------- -------
Cash and cash
equivalents,
end of period $87,471 $115,131 $144,289 $87,471 $144,289
======= ======== ======== ======= ========

Non-GAAP free cash
flow reconciliation:
Net cash provided
by operating
activities $75,302 $65,633 $67,380 $140,935 $131,442
Purchases of
property and
equipment (6,933) (6,572) (14,662) (13,505) (27,093)
Acquisitions of
intangible asset - (200) (1,000) (200) (1,000)
Acquisitions of
content library (43,224) (46,499) (44,410) (89,723) (95,726)
Proceeds from sale
of DVDs 1,159 2,726 5,379 3,885 9,886
Other assets 11 (2) 20 9 28
-- -- -- -- --
Non-GAAP free
cash flow $26,315 $15,086 $12,707 $41,401 $17,537
======= ======= ======= ======= =======

Netflix, Inc.
Consolidated Other Data
(unaudited)
(in thousands, except
percentages, average monthly
revenue per paying
subscriber, average monthly
gross profit per paying subscriber
and subscriber acquisition cost)
As of / Three Months Ended
--------------------------
June 30, March 31, June 30,
2009 2009 2008
---- ---- ----
Subscriber information:
Subscribers: beginning of
period 10,310 9,390 8,243
Gross subscriber
additions: during period 1,936 2,413 1,384
Gross subscriber
additions year-to-year
change 39.9% 29.6% 34.6%
Gross subscriber
additions quarter-to-
quarter sequential
change (19.8%) 15.7% (25.7%)
Less subscriber
cancellations: during
period (1,647) (1,493) (1,216)
Subscribers: end of period 10,599 10,310 8,411
Subscribers year-to-year
change 26.0% 25.1% 24.8%
Subscribers quarter-to-
quarter sequential change 2.8% 9.8% 2.0%
Free subscribers: end of
period 224 194 176
Free subscribers as
percentage of ending
subscribers 2.1% 1.9% 2.1%
Paid subscribers: end of
period 10,375 10,116 8,235
Paid subscribers year-to-
year change 26.0% 24.9% 24.6%
Paid subscribers quarter-
to-quarter sequential
change 2.6% 10.4% 1.6%
Average monthly revenue per
paying subscriber $13.29 $13.63 $13.78
Average monthly gross profit
per paying subscriber $4.53 $4.66 $4.39
Churn 4.5% 4.2% 4.2%
Subscriber acquisition cost $23.88 $25.79 $28.89
Margins:
Gross margin 34.1% 34.2% 31.8%
Operating margin 12.9% 9.3% 10.1%
Net margin 7.9% 5.7% 7.9%
Expenses as percentage of revenues:
Technology and development 6.6% 6.1% 6.6%
Marketing 11.3% 15.8% 11.8%
General and administrative 3.2% 3.3% 4.0%
Gain on disposal of DVDs 0.0% (0.2%) (0.7%)
--- ---- ----
Total operating expenses 21.1% 25.0% 21.7%
Year-to-year change:
Total revenues 21.0% 20.8% 11.2%
Subscription 16.0% 15.0% 16.1%
Fulfillment expenses 22.2% 23.3% 21.6%
Technology and development 22.2% 19.4% 18.0%
Marketing 15.6% 13.4% (11.6%)
General and administrative (1.2%) (5.3%) (2.9%)
Gain on disposal of DVDs (94.8%) 31.7% (0.8%)
Total operating expenses 17.9% 11.7% 6.9%

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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