EX-99.1 2 nflx-063013991.htm LETTER TO SHAREHOLDERS NFLX-06.30.13-EX99.1


Exhibit 99.1
July 22, 2013     

Dear Fellow Shareholders,

We have grown to nearly 30 million domestic members and 8 million international members. Q2 streaming revenue was up 26% domestically and 155% internationally over prior year.

Our first set of Netflix Originals earned 14 Emmy Award nominations, including “House of Cards” for Outstanding Drama Series. This is the first time an Internet TV show has been nominated for top Emmy awards.

We invite you to watch our live video interview at youtube.com/netflixir at 3pm Pacific today.

Summary Q2 Results & Q3 Guidance Midpoints
 (in millions except per share data)
Q1 '12
Q2 '12
Q3 '12
Q4 '12
Q1 '13
Q2 '13
Q3 '13 Guidance Midpoint
Domestic Streaming:
 
 
 
 
 
 
 
Net Additions
1.74

0.53

1.16

2.05

2.03

0.63

1.09

Total Members
23.41

23.94

25.10

27.15

29.17

29.81

30.90

Paid Members
22.02

22.69

23.80

25.47

27.91

28.62

29.75

Revenue
$
507

$
533

$
556

$
589

$
639

$
671

$
697

Contribution Profit*
$
72

$
87

$
96

$
113

$
131

$
151

$
166

Contribution Margin*
14.3
%
16.4
%
17.2
%
19.2
%
20.6
%
22.5
%
23.8
%
 
 
 
 
 
 
 
 
International Streaming:
 
 
 
 
 
 
 
Net Additions
1.21

0.56

0.69

1.81

1.02

0.61

0.90

Total Members
3.07

3.62

4.31

6.12

7.14

7.75

8.65

Paid Members
2.41

3.02

3.69

4.89

6.33

7.01

7.75

Revenue
$
43

$
65

$
78

$
101

$
142

$
166

$
177

Contribution Profit (Loss)
$
(103
)
$
(89
)
$
(92
)
$
(105
)
$
(77
)
$
(66
)
$
(78
)
 
 
 
 
 
 
 
 
Domestic DVD:
 
 
 
 
 
 
 
Total Members
10.09
9.24
8.61
8.22
7.98

7.51

 
Revenue
$
320

$
291

$
271

$
254

$
243

$
232

 
Contribution Profit
$
146

$
134

$
131

$
128

$
113

$
109

$
102

 
 
 
 
 
 
 
 
Global:
 
 
 
 
 
 
 
Revenue
$
870

$
889

$
905

$
945

$
1,024

$
1,069

 
Operating Income (Loss)
$
(2
)
$
16

$
16

$
20

$
32

$
57

 
Net Income (Loss)
$
(5
)
$
6

$
8

$
8

$ 3**

$
29

$
26

EPS
$
(0.08
)
$
0.11

$
0.13

$
0.13

$ 0.05**

$
0.49

$
0.43

 
 
 
 
 
 
 
 
Free Cash Flow
$
2

$
11

$
(20
)
$
(51
)
$
(42
)
$
13

 
Shares (FD)
55.5

58.8

58.7

59.1

60.1

60.6

 
* Contribution profit & margin for certain prior periods reflect reclassification of marketing overhead costs to G&A
** Net Income/EPS includes a $25m loss on extinguishment of debt ($16m net of tax)

           
                                                                                                                                       1


Domestic Streaming
As the table above shows, we are generating steady growth in members, revenue, and contribution profit. Our content mix, streaming and user experiences are all getting better and devices and bandwidth are improving. Countering this, competitors for consumer attention are also all improving, and the risk of U.S. market saturation only grows as we do. Given these competing forces, we are very happy this year to be tracking slightly ahead of prior year in terms of net additions.
We generally expect net additions in Q2 to be lower than prior year Q2 due to increased net-add seasonality as we grow. This Q2, however, was an exception, we believe due to the launch of Arrested Development. This show already had a strong brand and fan base, generating a small but noticeable bump in membership when we released it. Other great shows don't have that noticeable effect in their first season because they are less established.
Our contribution margin has now grown faster than our target for several quarters (up 610 basis points from Q2 2012 on a target of 400). In addition to growing members at a faster rate than expected, our outperformance is due to timing shifts on content deals and to a lesser degree just spending less on content than expected. We are growing domestic content spend significantly and plan to continue to do so. We've generally talked about how we're focused on 100 bps of sequential quarterly expansion, and how the lumpiness of content deals can make the q/q pattern somewhat irregular. Going forward, we'll slightly modify the articulation of our target from “an average of 100 bps per quarter” to “400 bps per year.”
In Q3, our guidance midpoint implies 130 bps of further margin expansion as we continue to run above our target. For Q4, we anticipate stepping up content spending even more, getting us closer to our 400 bps per year target. We'll keep targeting about 400 basis points of annual improvement into 2014 if we keep growing net additions at 2012/2013 levels.
In the quarter, we allowed our broad content deal with MTV Networks to expire. As we have said in the past, it is our preference to license specific shows that our members love in an exclusive manner. While the shows from Nickelodeon and Comedy Central came off our service, we introduced several new shows from Disney Jr., The Cartoon Network and the HUB for kids, and great comedies like “The New Girl” from Fox on July 1. Viewing and retention remain strong.
TV Everywhere continues to steadily improve, with, for example, the HBO Go app now available on AppleTV.
Hulu and Amazon Prime Instant Video continue to license some exclusive content and develop their own Originals. We have House of Cards and many others; Hulu has Battleground; and Amazon Prime Instant Video will have Alpha House; all are quite good and quite different. All three services are becoming more distinct from one another, like HBO, Showtime and Starz are distinct from one another on linear TV. Of our “top 200” titles, Hulu is now at 36 titles and Amazon Prime Instant Video is at 68. Now that Hulu has more money to spend, content prices may rise further, but we have many multi-year deals in place to mitigate this. Hulu and Amazon appear to have about the same amount of viewing, and Hulu recently reported 4 million paying members.



           
                                                                                                                                       2


International Streaming
Our International streaming segment saw membership growth in all markets. Net additions a year ago were boosted by our UK/Ireland launch, so we are very happy to match in Q2 the net additions of a year ago given we had no new territory launch in the first half of this year. As our guidance implies, we expect Q3 net additions to be above Q3 of last year, bolstered in part by the launch of Netflix Netherlands within the quarter.
In Latin America, we continued to see strong growth of new members in Brazil after our April price change from 15 BRL to 17 BRL. Prices update in August for grandfathered members but we expect a relatively small impact. Most prices in Brazil are rising due to substantial inflation.
Q2 international contribution loss was lower than expected due to slightly higher member growth and lower than anticipated growth in content spending across multiple markets. We plan to grow our international content investments in Q3 slightly ahead of revenues. This growth combined with the losses associated with the launch of the Netherlands results in our guidance reflecting a q/q increase in our combined international contribution loss.
Netherlands is about half the size of Canada, and is a good opportunity for us as we prepare for entry into more markets. We'll continue to expand in 2014 based upon the progression of our existing markets and on confidence in the expansion opportunities.
Originals
For years we have featured a broad selection of movies and TV series licensed from others, and we continue to improve the quality of this offering while seeking to differentiate Netflix by licensing that content exclusively. This licensed content accounts for the bulk of viewing and leads to a lot of member enjoyment.

Over the last six months, our move into Original programming has begun to redefine Netflix in the eyes of consumers. Our first five series -- Lilyhammer, House of Cards, Hemlock Grove, Arrested Development Season 4, and Orange is the New Black -- have engaged large audiences across our markets and are very different, allowing us to broaden our overall reach with each new Original.

We assess the success of each Original by looking at viewing-to-date and estimated future viewing, relative to cost. So far, we've ordered second seasons of all first season projects, which is quite unusual and exciting for the fans of these shows. We'd be delighted to produce a fifth season of Arrested Development, if possible, given fan reaction.

We are thrilled to have the Netflix Originals nominated for 14 Emmys, with House of Cards earning nine nominations including Outstanding Drama, Arrested Development garnering three, and Hemlock Grove two. We couldn't be more proud and pleased for the series creators, actors, composers, designers and others who are being recognized by their peers for the excellence of their storytelling on Netflix.

Later this month, we will premiere Mako Mermaids, a series aimed at teen audiences, while for the remainder of 2013 we will launch the Ricky Gervais series Derek and season two of Lilyhammer, followed by Turbo: F.A.S.T.(Fast Action Stunt Team), our first animated Original from DreamWorks Animation. We're excited about our plans for 2014 and beyond as we premiere season two of House of Cards,

           
                                                                                                                                       3


Hemlock Grove, and Orange is the New Black, and debut Sense 8, and multiple kids Originals from DreamWorks Animation.

Beyond series, we will be expanding our Originals initiative to include broadly appealing feature documentaries and stand-up comedy specials. Netflix has become a big destination for fans of these much loved and often under-distributed genres.

We'll continue to build on our initial success with Originals as we gain confidence in our ability to use our judgment and data to find projects that our members will enjoy.
Based on the viewing trends we see with other similar television series, we are amortizing Originals on a straight-line basis over the shorter of 4 years or the license period1. We are in the early stages of Originals and continue to monitor whether the viewing pattern is enough higher in the first few months to have us amortize at a faster initial rate, and then to continue on a straight-line basis for the remainder of the amortization period. In terms of relative size, of the approximately $3 billion in content library net book value we are amortizing, currently around 5% is for Originals.
Streaming Service Getting Better
Our Product Innovation teams greatly enhanced the features and delivery of our service during the quarter, as well as improved discovery and merchandising of our content library.

During Q2, we rolled out a new streaming player platform to all partners and began work towards a single UI to run across multiple devices that will be optimized for various input devices (voice interactions, pointer, and left/right/up/down controllers). The new platform and UI are optimized for better performance and faster starts and allow us to increase the number of platforms on which we can conduct AB testing for even more rapid innovation.

In Q2, we also continued to focus efforts on improving our recommendation algorithms to help our members discover great content. Our recommendation algorithms create a highly personalized experience for each of our streaming members, allowing them to easily find content they'll love and allowing us to optimize the utility of the content library. Constant innovation in this important area (more than ¾ of the hours streamed on Netflix come from personalized suggestions generated by our recommendation algorithms) continues across a variety of dimensions.

We continue improving features which will facilitate social interaction among members by allowing them to provide direct recommendations to one another, provide feedback about those recommendations and to share them with mutual friends.

In Q3, we'll be rolling out our profiles features which will allow households to have distinct “profiles” for different members or viewing tastes within their home, enabling us to provide a much more personalized experience for our members.




_________________
1 If a subsequent season is added, we extend the remaining amortization period by a year.


           
                                                                                                                                       4


Our default $7.99 plan includes two simultaneous streams. We added an additional plan, at $11.99, that includes 4 simultaneous streams for the few large families that would otherwise need two separate accounts and partition their TVs between the two accounts. As expected, the take rate on this large family plan is minimal. Our default limit of two simultaneous streams keeps password sharing with non-household members to a minimum because it risks the account owner not being able to watch when they want.
Marketing
With our new Watch Responsibly ads, we've sought to tell a fun and emotional story that ties consumers to the Netflix brand and highlight attributes of our service that drive certain consumer behaviors - like watching ahead, spoiling it for others, and marathon viewing. We didn't invent these behaviors, but they've become associated with Netflix and highlight the fundamental changes in the way consumers are enjoying TV series and movies.

We've also begun to shine an even more effective light on the great content available on Netflix, particularly our Originals. Each Original has been backed by distinctive marketing and promotional campaigns that have served to increase awareness of our service and to trigger engagement among both members and non-members. The publicity surrounding Originals has been very substantial and generally very positive, leading in turn to improved perception of the quality of content on our service and on the value we offer to members.
DVD
The huge selection we offer on DVD continues to be a draw for over 7 million households.
DVD contribution profit declined 19% y/y, in line with the decline in member/revenues, as most of the costs scale with member/shipment levels.
We continue to anticipate being able to maintain approximately the margins we've posted in the first half of 2013 throughout the full year. Consistent with our view in prior quarters, we don't foresee USPS service changes that will have a material negative impact upon us or our members over the next few quarters.
Free Cash Flow & Capital
Free cash flow was +$13 million in Q2, a swing to positive reflecting the relatively fewer content payments in the quarter and strong global profit growth. Our investments in content, including Originals, will continue to weigh on FCF relative to net income and thus our FCF trends.

In April, we converted the 2011 TCV $200 million convertible notes to the corresponding 2.3 million shares as discussed in our Q1 letter. Our sole remaining long-term debt is the $500 million notes we raised in February, which is due in 2021.

We continue to have just over a $1 billion in cash and equivalents.


           
                                                                                                                                       5



Business Outlook
For investor convenience we placed the midpoints of our guidance ranges in the table at the beginning of this letter. This does not make the midpoint the “goal”. Our best estimate is we will be within the ranges below. The ranges below are our guidance.


 
Q3 2013 Guidance
 (in millions except per share data)
 
Domestic Streaming:
 
Total members
30.5 to 31.3
Paid members
29.4 to 30.1
Revenue
$693 to $701
Contribution Profit
$161 to $171
 
 
International Streaming:
 
Total members
8.3 to 9.0
Paid members
7.5 to 8.0
Revenue
$170 to $184
Contribution Profit (Loss)
($86) to ($70)
 
 
Domestic DVD:
 
Contribution Profit
$96 to $108
 
 
Consolidated Global:
 
Net Income
$18 to $34
EPS
$0.30 to $0.56

Summary
 
We are thrilled to be pleasing more members than ever.

The world is moving from linear TV to Internet TV and Netflix is leading that evolution.

Sincerely,


           
                                                                                                                                       6





 
Reed Hastings, CEO
David Wells, CFO

Second Quarter 2013 Earnings Interview
Netflix Chief Executive Officer Reed Hastings, Chief Financial Officer David Wells and Chief Content Officer Ted Sarandos will participate in a live video interview about the Company's financial results and business outlook at 3:00 p.m. Pacific Time. The interview will be conducted by Rich Greenfield, BTIG Research and Julia Boorstin, CNBC, with questions submitted via email or twitter. Questions from investors should be submitted to rgreenfield@btig.com /@RichBTIG or Julia.boorstin@nbcuni.com / @JBoorstin.
The live broadcast will be at www.youtube.com/netflixir.



IR Contact:
PR Contact:
Erin Kasenchak

Jonathan Friedland

Director, Investor Relations

Chief Communications Officer

408 540-3691

310 734-2958


           
                                                                                                                                       7



Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-GAAP financial measures of free cash flow. Management believes that free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certain other activities. However, this non-GAAP measure should be considered in addition to, not as a substitute for or superior to, net income, operating income, diluted earnings per share and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of this non-GAAP measure is contained in tabular form on the attached unaudited financial statements.
 
Forward-Looking Statements
This shareholder letter contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding meeting domestic contribution margin targets; investments in content, particularly exclusive and original content; subscriber acquisition seasonality; potential effects of competition and market saturation; international contribution margin and impacts arising from expansion to the Netherlands; improvements to our service, including the rollout of profiles and social features; content accounting for originals; business outlook for our DVD segment, including contribution margins and the impact of USPS service changes; free cash flow and usage of cash; member growth, including total and paid; revenue and contribution profit (loss) for both domestic (streaming and DVD) and international operations as well as net income and earnings per share for the third quarter of 2013. The forward-looking statements in this letter are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for instant streaming; fluctuations in consumer usage of our service; disruption in service on our website and systems or with third-party computer systems that help us operate our service; 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 1, 2013. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this shareholder letter.







           
                                                                                                                                       8



Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
March 31,
2013
 
June 30,
2012 (1)
 
June 30,
2013
 
June 30,
2012 (1)
Revenues
$
1,069,372

 
$
1,023,961

 
$
889,163

 
$
2,093,333

 
$
1,758,954

Cost of revenues
753,525

 
726,863

 
643,428

 
1,480,388

 
1,267,361

Marketing
121,760

 
129,175

 
113,964

 
250,935

 
243,892

Technology and development
93,126

 
91,975

 
81,547

 
185,101

 
164,348

General and administrative
43,844

 
44,126

 
34,070

 
87,970

 
69,134

Operating income
57,117

 
31,822

 
16,154

 
88,939

 
14,219

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(7,528
)
 
(6,740
)
 
(5,006
)
 
(14,268
)
 
(9,980
)
Interest and other income (expense)
(2,940
)
 
977

 
(493
)
 
(1,963
)
 
(609
)
Loss on extinguishment of debt

 
(25,129
)
 

 
(25,129
)
 

Income before income taxes
46,649

 
930

 
10,655

 
47,579

 
3,630

Provision (benefit) for income taxes
17,178

 
(1,759
)
 
4,491

 
15,419

 
2,050

Net income
$
29,471

 
$
2,689

 
$
6,164

 
$
32,160

 
$
1,580

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.05

 
$
0.11

 
$
0.56

 
$
0.03

Diluted
$
0.49

 
$
0.05

 
$
0.11

 
$
0.53

 
$
0.03

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
58,192

 
55,972

 
55,526

 
57,089

 
55,491

Diluted
60,590

 
60,146

 
58,809

 
60,369

 
58,878

 
(1) Certain prior period amounts have been reclassified from "Marketing" to "General and administrative" to conform to current period presentation.





           
                                                                                                                                       9




Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
 
 
As of
 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
370,678

 
$
290,291

Short-term investments
709,432

 
457,787

Current content library, net
1,363,609

 
1,368,162

Prepaid content
32,064

 
59,929

Other current assets
94,539

 
64,622

Total current assets
2,570,322

 
2,240,791

Non-current content library, net
1,682,202

 
1,506,008

Property and equipment, net
127,931

 
131,681

Other non-current assets
100,296

 
89,410

Total assets
$
4,480,751

 
$
3,967,890

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
1,321,217

 
$
1,366,847

Accounts payable
103,441

 
86,468

Accrued expenses
59,035

 
53,139

Deferred revenue
186,571

 
169,472

Total current liabilities
1,670,264

 
1,675,926

Non-current content liabilities
1,124,249

 
1,076,622

Long-term debt
500,000

 
200,000

Long-term debt due to related party

 
200,000

Other non-current liabilities
80,616

 
70,669

Total liabilities
3,375,129

 
3,223,217

Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 160,000,000 shares authorized at June 30, 2013 and December 31, 2012; 58,922,493 and 55,587,167 issued and outstanding at June 30, 2013 and December 31, 2012, respectively
59

 
56

Additional paid-in capital
634,985

 
301,616

Accumulated other comprehensive (loss) income
(1,664
)
 
2,919

Retained earnings
472,242

 
440,082

Total stockholders' equity
1,105,622

 
744,673

Total liabilities and stockholders' equity
$
4,480,751

 
$
3,967,890

 

           
                                                                                                                                       10



Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
March 31,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income
$
29,471

 
$
2,689

 
$
6,164

 
$
32,160

 
$
1,580

Adjustments to reconcile net income to net cash provided by (used in)operating activities:
 
 
 
 
 
 
 
 
 
Additions to streaming content library
(593,454
)
 
(591,941
)
 
(374,252
)
 
(1,185,395
)
 
(1,139,145
)
Change in streaming content liabilities
7,284

 
9,700

 
(39,947
)
 
16,984

 
357,606

Amortization of streaming content library
510,250

 
485,740

 
375,997

 
995,990

 
715,733

Amortization of DVD content library
17,709

 
18,237

 
16,304

 
35,946

 
36,350

Depreciation and amortization of property, equipment and intangibles
12,026

 
12,051

 
11,047

 
24,077

 
22,378

Stock-based compensation expense
17,955

 
17,746

 
18,450

 
35,701

 
37,782

Excess tax benefits from stock-based compensation
(20,368
)
 
(11,615
)
 
(307
)
 
(31,983
)
 
(4,062
)
Other non-cash items
1,188

 
1,750

 
(1,579
)
 
2,938

 
(3,098
)
Loss on extinguishment of debt

 
25,129

 

 
25,129

 

Deferred taxes
(2,040
)
 
(6,748
)
 

 
(8,788
)
 
(10,843
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Prepaid content
25,190

 
2,675

 
4,503

 
27,865

 
7,497

Other current assets
8,572

 
(8,402
)
 
(8,077
)
 
170

 
3,664

Accounts payable
(5,138
)
 
17,019

 
316

 
11,881

 
(1,440
)
Accrued expenses
10,494

 
(4,132
)
 
6,854

 
6,362

 
8,637

Deferred revenue
7,693

 
9,406

 
2,188

 
17,099

 
3,994

Other non-current assets and liabilities
7,111

 
8,446

 
1,746

 
15,557

 
1,883

Net cash provided by (used in) operating activities
33,943

 
(12,250
)
 
19,407

 
21,693

 
38,516

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisitions of DVD content library
(14,023
)
 
(21,193
)
 
(8,012
)
 
(35,216
)
 
(21,540
)
Purchases of property and equipment
(8,088
)
 
(12,118
)
 
(3,359
)
 
(20,206
)
 
(8,125
)
Other assets
1,087

 
4,050

 
3,132

 
5,137

 
4,466

Purchases of short-term investments
(146,050
)
 
(235,623
)
 
(63,303
)
 
(381,673
)
 
(362,770
)
Proceeds from sale of short-term investments
33,979

 
81,228

 
48,173

 
115,207

 
220,508

Proceeds from maturities of short-term investments
5,410

 
4,420

 
12,715

 
9,830

 
20,990

Net cash used in investing activities
(127,685
)
 
(179,236
)
 
(10,654
)
 
(306,921
)
 
(146,471
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
28,846

 
39,146

 
524

 
67,992

 
1,748

Issuance costs

 
(9,414
)
 
(371
)
 
(9,414
)
 
(759
)
Redemption of debt

 
(219,362
)
 

 
(219,362
)
 

Proceeds from issuance of debt

 
500,000

 

 
500,000

 

Excess tax benefits from stock-based compensation
20,368

 
11,615

 
307

 
31,983

 
4,062

Principal payments of lease financing obligations
(255
)
 
(403
)
 
(577
)
 
(658
)
 
(1,136
)
Net cash provided by (used in) financing activities
48,959

 
321,582

 
(117
)
 
370,541

 
3,915

 Effect of exchange rate changes on cash and cash equivalents
(2,590
)
 
(2,336
)
 
(2,377
)
 
(4,926
)
 
(1,762
)
 Net (decrease) increase in cash and cash equivalents
(47,373
)
 
127,760

 
6,259

 
80,387

 
(105,802
)
 Cash and cash equivalents, beginning of period
418,051

 
290,291

 
395,992

 
290,291

 
508,053

 Cash and cash equivalents, end of period
$
370,678

 
$
418,051

 
$
402,251

 
$
370,678

 
$
402,251

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
March 31,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Non-GAAP free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
33,943

 
$
(12,250
)
 
$
19,407

 
$
21,693

 
$
38,516

Acquisitions of DVD content library
(14,023
)
 
(21,193
)
 
(8,012
)
 
(35,216
)
 
(21,540
)
Purchases of property and equipment
(8,088
)
 
(12,118
)
 
(3,359
)
 
(20,206
)
 
(8,125
)
Other assets
1,087

 
4,050

 
3,132

 
5,137

 
4,466

Non-GAAP free cash flow
$
12,919

 
$
(41,511
)
 
$
11,168

 
$
(28,592
)
 
$
13,317


           
                                                                                                                                       11



Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
 
As of / Three Months Ended
 
As of/ Six Months Ended
 
June 30,
2013
 
March 31,
2013
 
June 30,
 2012 (1)
 
June 30,
2013
 
June 30,
2012 (1)
Domestic Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
29,807

 
29,174

 
23,938

 
29,807

 
23,938

Paid members at end of period
28,624

 
27,913

 
22,686

 
28,624

 
22,686

 
 
 
 
 
 
 
 
 
 
Revenue
$
671,089

 
$
638,649

 
$
532,705

 
$
1,309,738

 
$
1,039,370

Cost of revenues
449,473

 
436,506

 
378,574

 
885,979

 
739,350

Marketing
70,302

 
70,793

 
66,732

 
141,095

 
140,137

Contribution profit
151,314

 
131,350

 
87,399

 
282,664

 
159,883

 
 
 
 
 
 
 
 
 
 
International Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
7,747

 
7,142

 
3,624

 
7,747

 
3,624

Paid members at end of period
7,014

 
6,331

 
3,024

 
7,014

 
3,024

 
 
 
 
 
 
 
 
 
 
Revenue
$
165,902

 
$
142,019

 
$
64,973

 
$
307,921

 
$
108,398

Cost of revenues
182,885

 
165,024

 
108,542

 
347,909

 
199,953

Marketing
48,850

 
53,915

 
45,858

 
102,765

 
100,555

Contribution profit (loss)
(65,833
)
 
(76,920
)
 
(89,427
)
 
(142,753
)
 
(192,110
)
 
 
 
 
 
 
 
 
 
 
Domestic DVD
 
 
 
 
 
 
 
 
 
Total members at end of period
7,508

 
7,983

 
9,240

 
7,508

 
9,240

Paid members at end of period
7,369

 
7,827

 
9,145

 
7,369

 
9,145

 
 
 
 
 
 
 
 
 
 
Revenue
$
232,381

 
$
243,293

 
$
291,485

 
$
475,674

 
$
611,186

Cost of revenues
121,167

 
125,333

 
156,312

 
246,500

 
328,058

Marketing
2,608

 
4,467

 
1,374

 
7,075

 
3,200

Contribution profit
108,606

 
113,493

 
133,799

 
222,099

 
279,928

 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
1,069,372

 
$
1,023,961

 
$
889,163

 
$
2,093,333

 
$
1,758,954

Cost of revenues
753,525

 
726,863

 
643,428

 
1,480,388

 
1,267,361

Marketing
121,760

 
129,175

 
113,964

 
250,935

 
243,892

Contribution profit
194,087

 
167,923

 
131,771

 
362,010

 
247,701

Other operating expenses
136,970

 
136,101

 
115,617

 
273,071

 
233,482

Operating income
57,117

 
31,822

 
16,154

 
88,939

 
14,219

Other income (expense)
(10,468
)
 
(5,763
)
 
(5,499
)
 
(16,231
)
 
(10,589
)
Loss on extinguishment of debt

 
(25,129
)
 

 
(25,129
)
 

Provision (benefit) for income taxes
17,178

 
(1,759
)
 
4,491

 
15,419

 
2,050

Net income
$
29,471

 
$
2,689

 
$
6,164

 
$
32,160

 
$
1,580


(1) Certain prior period amounts have been reclassified from "Marketing" to "General and administrative" to conform to current period presentation.


           
                                                                                                                                       12