@import url(http://finance.paidcontent.org/client/paidcontent/privatelabel.css);
July 25, 2008 at 07:00 AM EDT
Netflix Announces Q2 2008 Financial Results

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%

SOURCE Netflix, Inc.

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