EX-99.1 2 dex991.htm PRESS RELEASE Press Release

Exhibit 99.1

LOGO

 

FOR IMMEDIATE RELEASE    IR CONTACT:    Deborah Crawford
Monday, October 23, 2006       Director, Investor Relations
      408 540-3712
   PR CONTACT:    Ken Ross
      VP, Corporate Communications
      408 540-3931

Netflix Announces Q3 2006 Financial Results

Subscribers – 5.7 million, up 58 percent year-over-year

Revenue – $256 million, up 48 percent year-over-year

GAAP Net Income – $12.8 million, up 84 percent year-over-year

LOS GATOS, Calif., October 23, 2006 – Netflix, Inc. (Nasdaq: NFLX) today reported results for the third quarter ended September 30, 2006.

“In the third quarter, strong results in our key metrics – subscriber growth, revenue, net income, gross margin and churn – extended our record of outstanding financial and operational performance and, more importantly, demonstrated the power of our business model to deliver exceptional results,” said Reed Hastings, Netflix co-founder and chief executive officer. “We combine a great customer experience with low operating costs. That’s a powerful formula for success.”

Third-Quarter 2006 Financial Highlights

Revenue1 for the third quarter of 2006 was $256.0 million, representing 48 percent year-over-year growth from $172.7 million for the third quarter of 2005, and 7 percent sequential growth from $239.4 million for the second quarter of 2006.

GAAP net income for the third quarter of 2006 was $12.8 million, or $0.18 per diluted share, compared to GAAP net income of $6.9 million, or $0.11 per diluted share, for the third quarter of 2005 and GAAP net income of $17.0 million, or $0.25 per diluted share, for the second quarter of 2006. GAAP net income grew 84% on a year-over-year basis and declined 25% on a quarter-over-quarter basis for the third quarter of 2006.

Non-GAAP net income was $14.6 million, or $0.21 per diluted share, for the third quarter of 2006, compared to non-GAAP net income of $10.2 million, or $0.16 per diluted share, for the third quarter of 2005 and non-GAAP net income of $18.9 million, or $0.27 per diluted share, for the second quarter of 2006. Non-GAAP net income grew 43% on a year-over-year basis and declined 23% on a quarter-over quarter-basis for the third quarter of 2006.

 

1 The Company had previously recorded proceeds from sales of previously viewed DVDs and the related cost of DVDs sales as Sales revenue and Cost of sales revenue, respectively. The Company now records the net gain on sales of DVDs as a separate line item on the income statement.

Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense, net of taxes.

Gross margin2 for the third quarter of 2006 was 38.0 percent, compared to 33.1 percent for the third quarter of 2005 and 37.1 percent for the second quarter of 2006.

Stock-based compensation. In accordance with SEC Staff Accounting Bulletin No. 107, stock-based compensation is no longer presented as a separate line item on our income statement. Stock-based compensation is now presented in the same lines as cash compensation paid to the same individuals. Stock-based compensation recognized in prior periods has been reclassified to conform with the presentation in the current period. In the third quarter, the charge related to stock-based compensation was $3.2 million, compared to $3.3 million in the third quarter of 2005 and compared to $3.1 million in the second quarter of 2006.

Free cash flow3 for the third quarter of 2006 was $22.3 million, compared to $7.0 million in the third quarter of 2005 and $5.5 million for the second quarter of 2006.

Cash provided by operating activities for the third quarter of 2006 was $75.3 million, compared to $33.3 million for the third quarter of 2005 and $46.3 million for the second quarter of 2006.

Subscriber acquisition cost4 for the third quarter of 2006 was $45.32 per gross subscriber addition, compared to $36.33 for the same period of 2005 and $43.95 for the second quarter of 2006.

Churn5 for the third quarter of 2006 was 4.2 percent, compared to 4.3 percent for the third quarter of 2005 and 4.3 percent for the second quarter of 2006. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Subscribers. Netflix ended the third quarter of 2006 with approximately 5,662,000 total subscribers, representing 58 percent year-over-year growth from 3,592,000 total subscribers at the end of the third quarter of 2005 and 10 percent sequential growth from 5,169,000 subscribers at the end of the second quarter of 2006.

Net subscriber additions in the quarter were 493,000, compared to 396,000 for the same period of 2005 and 303,000 for the second quarter of 2006.

During the quarter Netflix acquired 1,310,000 gross subscriber additions, representing 42 percent year-over-year growth from 921,000 gross subscriber additions in the third quarter of 2005 and 22 percent quarter-over-quarter growth from 1,070,000 gross subscriber additions in the second quarter of 2006.

Of the 5,662,000 total subscribers at quarter end, 97 percent, or 5,489,000, were paid subscribers. The other 3 percent, or 173,000, were free subscribers. Paid subscribers represented 95 percent of total subscribers at the end of the third quarter of 2005 and 97 percent of total subscribers at the end of the second quarter of 2006.

 

2 Gross margin is defined as revenue less cost of subscription and fulfillment expense. The Company had previously recorded fulfillment expense as an operating expense.
3 Free cash flow is defined as cash provided by operating activities less cash used in investing activities excluding purchases and sales of short-term investments.
4 Subscriber acquisition cost is defined as the total marketing expense, which includes stock-based compensation for marketing personnel, on the Company’s Statement of Operations divided by total gross subscriber additions during the quarter.
5 Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months.

Business Outlook

The Company’s performance expectations for the fourth quarter of 2006 and full-year 2006 and 2007 are as follows:

Fourth-Quarter 2006

 

•   Ending subscribers of at least 6.3 million

 

•   Revenue of $273 million to $278 million, up from $267 million to $272 million

 

•   GAAP net income of $7.5 million to $13.5 million, up from $3.8 million to $8.8 million

Full-Year 2006

 

•   Ending subscribers of at least 6.3 million

 

•   Revenue of $992.4 million to $997.4 million, up from at least $980 million

 

•   GAAP net income of $41.7 million to $47.7 million, up from $30 million to $35 million

Full-Year 2007

 

•   GAAP net income of $55 million to $60 million, or $0.76 to $0.83 per diluted share

Float and Trading Plans

The Company estimates the public float at approximately 55,230,571 shares as of September 30, 2006, up 1 percent from 54,880,404 shares as of June 30, 2006, 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 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. Following the conclusion of the webcast, a replay of the call will be available via Netflix’s website at http://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from approximately 6:00 p.m. Pacific Time on October 23, 2006 through October 28, 2006. To listen to a replay, call (719) 457-0820, access code 4010317.

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, and, where specified, excludes the benefit of the realized tax assets. 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 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 (Nasdaq: NFLX) is the world’s largest online movie rental service, providing more than five million subscribers access to over 65,000 DVD titles. The company offers a variety of subscription plans, starting at $5.99 a month. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by the USPS from regional shipping centers located throughout the United States. Netflix can reach more than 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than one billion movie ratings. Netflix also allows members to share and recommend movies to one another through its FriendsSM feature. For more information, visit 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 and GAAP net income for the fourth quarter of 2006 as well as subscriber growth, revenue and GAAP net income for the full-year 2006 and GAAP net income and earnings per share for the full-year 2007. 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: impacts arising out of competition, our ability to manage our growth, in particular, managing our subscriber acquisition cost as well as the mix between revenue sharing titles and titles not subject to revenue sharing that are delivered to our subscribers; our ability to attract new subscribers and retain existing subscribers; changes in pricing, availability and effectiveness related to our advertising; fluctuations in consumer usage of our service, 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; 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; 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 March 16, 2006. 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     Nine Months Ended  
     September 30,
2005		     June 30,
2006		     September 30,
2006		     September 30,
2005		     September 30,
2006		  

Revenues

    $ 172,740     $ 239,351     $ 255,950     $ 489,213     $ 719,427  

Cost of revenues:

           

Subscription

      97,878       128,605       135,210       291,821       390,035  

Fulfillment expenses*

      17,771       21,974       23,583       52,798       67,602  
                                        

Total cost of revenues

      115,649       150,579       158,793       344,619       457,637  
                                        

Gross profit

      57,091       88,772       97,157       144,594       261,790  

Operating expenses:

           

Technology and development *

      8,955       12,043       11,929       26,169       35,178  

Marketing *

      33,463       47,031       59,367       96,971       159,366  

General and administrative *

      9,541       6,773       9,948       22,462       25,013  

Gain on disposal of DVDs

      (388 )     (964 )     (1,142 )     (1,199 )     (3,493 )
                                        

Total operating expenses

      51,571       64,883       80,102       144,403       216,064  
                                        

Operating income

      5,520       23,889       17,055       191       45,726  

Other income (expense):

           

Interest and other income

      1,491       3,701       4,687       3,788       10,840  

Interest and other expense

      (13 )     —         —         (54 )     —    
                                        

Income before income taxes

      6,998       27,590       21,742       3,925       56,566  

Provision for income taxes

      52       10,553       8,961       109       22,344  
                                        

Net income

    $ 6,946     $ 17,037     $ 12,781     $ 3,816     $ 34,222  
                                        

Net income per share:

           

Basic

    $ .13     $ .29     $ .19     $ .07     $ .56  

Diluted

    $ .11     $ .25     $ .18     $ .06     $ .50  

Weighted average common shares outstanding:

           

Basic

      53,693       58,383       68,081       53,237       60,606  

Diluted

      66,012       69,175       70,345       64,928       68,626  

Amortization of stock-based compensation included in expense line items:

          

Fulfillment

    $ 227     $ 223     $ 213     $ 1,000     $ 696  

Technology and development

      949       867       884       3,495       2,716  

Marketing

      596       529       540       1,963       1,623  

General and administrative

      1,521       1,468       1,532       4,537       4,531  
                                        
   $ 3,293     $ 3,087     $ 3,169     $ 10,995     $ 9,566  
                                        

Reconciliation of Non-GAAP Financial Measures Non-GAAP net income reconciliation:

           

Net income

    $ 6,946     $ 17,037     $ 12,781     $ 3,816     $ 34,222  

Add back:

           

Stock-based compensation

      3,293       3,087       3,169       10,995       9,566  

Income tax effect of stock-based compensation

      —         (1,179 )     (1,306 )     —         (3,779 )
                                        

Non-GAAP net income

    $ 10,239     $ 18,945     $ 14,644     $ 14,811     $ 40,009  
                                        

Non-GAAP net income per share:

           

Basic

    $ .19     $ .32     $ .22     $ .28     $ .66  

Diluted

    $ .16     $ .27     $ .21     $ .23     $ .58  

Weighted average common shares outstanding:

           

Basic

      53,693       58,383       68,081       53,237       60,606  

Diluted

      66,012       69,175       70,345       64,928       68,626  
* Stock-based compensation recognized in the three and nine months ended September 30, 2005 has been reclassed to this expense line to conform with the current period presentation.

Netflix, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)

 

     As of  
     December 31,
2005		     September 30,
2006		  

Assets

    

Current assets:

     

Cash and cash equivalents

    $ 212,256     $ 368,741  

Prepaid expenses

      7,848       5,243  

Prepaid revenue sharing expenses

      5,252       6,932  

Deferred tax assets

      13,666       4,654  

Other current assets

      4,669       9,524  
                

Total current assets

      243,691       395,094  

DVD library, net

      57,032       92,013  

Intangible assets, net

      457       994  

Property and equipment, net

      40,213       43,164  

Deposits

      1,249       1,139  

Deferred tax assets

      21,239       16,752  

Other assets

      800       1,438  
                

Total assets

    $ 364,681     $ 550,594  
                

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable

    $ 63,491     $ 81,968  

Accrued expenses

      25,563       30,639  

Deferred revenue

      48,533       49,875  
                

Total current liabilities

      137,587       162,482  

Deferred rent

      842       1,109  
                

Total liabilities

      138,429       163,591  

Stockholders’ equity:

     

Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 2005 and September 30, 2006; 54,755,731 and 68,154,177 issued and outstanding at December 31, 2005 and September 30, 2006, respectively

      55       68  

Additional paid-in capital

      315,868       442,384  

Accumulated deficit

      (89,671 )     (55,449 )
                

Total stockholders’ equity

      226,252       387,003  
                

Total liabilities and stockholders’ equity

    $ 364,681     $ 550,594  
                

Netflix, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2005		    

June 30,

2006

     September 30,
2006		     September 30,
2005		     September 30,
2006		  

Cash flows from operating activities:

           

Net income (loss)

    $ 6,946     $ 17,037     $ 12,781     $ 3,816     $ 34,222  

Adjustments to reconcile net income to net cash provided by operating activities:

           

Depreciation of property and equipment

      2,424       3,854       4,066       6,518       11,529  

Amortization of DVD library

      24,477       31,910       36,253       72,035       95,444  

Amortization of intangible assets

      139       11       25       973       48  

Stock-based compensation expense

      3,293       3,087       3,169       10,995       9,566  

Excess tax benefits from stock-based compensation

      —         (2,952 )     (3,923 )     —         (7,565 )

Loss on disposal of property and equipment

      —         —         —         —         (23 )

Gain on disposal of DVDs

      (819 )     (2,029 )     (2,241 )     (2,156 )     (6,319 )

Noncash interest expense

      —         —         —         11       —    

Deferred taxes

      —         7,315       4,126       —         13,499  

Changes in operating assets and liabilities:

           

Prepaid expenses and other current assets

      1,401       (6,091 )     (143 )     2,853       (3,930 )

Accounts payable

      (12,260 )     (7,211 )     11,183       (5,824 )     18,477  

Accrued expenses

      6,702       153       9,049       7,273       12,641  

Deferred revenue

      903       1,104       846       2,464       1,342  

Deferred rent

      90       119       78       275       267  
                                        

Net cash provided by operating activities

      33,296       46,307       75,269       99,233       179,198  
                                        

Cash flows from investing activities:

           

Purchases of property and equipment

      (5,429 )     (5,373 )     (5,623 )     (18,205 )     (14,480 )

Acquisition of intangible asset

      (481 )     (585 )     —         (481 )     (585 )

Acquisitions of DVD library

      (21,939 )     (37,669 )     (50,670 )     (84,197 )     (133,015 )

Proceeds from sale of DVDs

      1,577       2,753       3,675       3,741       8,909  

Proceeds from disposal of property and equipment

      —         —         —         —         23  

Deposits and other assets

      (10 )     74       (311 )     (165 )     (528 )
                                        

Net cash used in investing activities

      (26,282 )     (40,800 )     (52,929 )     (99,307 )     (139,676 )
                                        

Cash flows from financing activities:

           

Proceeds from issuance of common stock

      3,900       105,478       776       7,578       109,398  

Principal payments on notes payable and capital lease obligations

      —         —         —         (79 )     —    

Excess tax benefits from stock-based compensation

      —         2,952       3,923       —         7,565  
                                        

Net cash provided by financing activities

      3,900       108,430       4,699       7,499       116,963  
                                        

Net increase (decrease) in cash and cash equivalents

      10,914       113,937       27,039       7,425       156,485  

Cash and cash equivalents, beginning of period

      170,972       227,765       341,702       174,461       212,256  
                                        

Cash and cash equivalents, end of period

    $ 181,886     $ 341,702     $ 368,741     $ 181,886     $ 368,741  
                                        

Non-GAAP free cash flow reconciliation:

           

Net cash provided by operating activities

    $ 33,296     $ 46,307     $ 75,269     $ 99,233     $ 179,198  

Purchases of property and equipment

      (5,429 )     (5,373 )     (5,623 )     (18,205 )     (14,480 )

Acquisition of intangible asset

      (481 )     (585 )     —         (481 )     (585 )

Acquisitions of DVD library

      (21,939 )     (37,669 )     (50,670 )     (84,197 )     (133,015 )

Proceeds from sale of DVDs

      1,577       2,753       3,675       3,741       8,909  

Proceeds from disposal of property and equipment

      —         —         —         —         23  

Deposits and other assets

      (10 )     74       (311 )     (165 )     (528 )
                                        

Non-GAAP free cash flow

    $ 7,014     $ 5,507     $ 22,340     $ (74 )   $ 39,522  
                                        

Netflix, Inc.

Consolidated Other data

(unaudited)

(in thousands, except percentages and subscriber acquisition cost)

 

     As of / Three Months Ended     As of / Nine Months Ended  
     September 30,
2005		     June 30,
2006		     September 30,
2006		     September 30,
2005		     September 30,
2006		  

Subscriber information:

           

Subscribers: beginning of period

      3,196       4,866       5,169       2,610       4,179  

Gross subscribers additions: during period

      921       1,070       1,310       2,573       3,757  

Gross subscriber additions year-to-year change

      56.1 %     51.3 %     42.2 %     33.1 %     46.0 %

Gross subscriber additions quarter-to-quarter sequential change

      30.3 %     (22.3 )%     22.4 %     —         —    

Less subscriber cancellations : during period

      (525 )     (767 )     (817 )     (1,591 )     (2,274 )

Subscribers: end of period

      3,592       5,169       5,662       3,592       5,662  

Subscribers year-to-year change

      61.1 %     61.7 %     57.6 %     61.1 %     57.6 %

Subscribers quarter-to-quarter sequential change

      12.4 %     6.2 %     9.5 %     —         —    

Free subscribers: end of period

      169       152       173       169       173  

Free subscribers as percentage of ending subscribers

      4.7 %     2.9 %     3.1 %     4.7 %     3.1 %

Paid subscribers: end of period

      3,423       5,017       5,489       3,423       5,489  

Paid subscribers year-to-year change

      60.3 %     61.4 %     60.4 %     60.3 %     60.4 %

Paid subscribers quarter-to-quarter sequential change

      10.1 %     6.0 %     9.4 %     —         —    

Churn

     4.3 %     4.3 %     4.2 %     —         —    

Subscriber acquisition cost

    $ 36.33     $ 43.95     $ 45.32     $ 37.69     $ 42.42  

Margins:

           

Gross margin

      33.1 %     37.1 %     38.0 %     29.6 %     36.4 %

Operating margin

      3.2 %     10.0 %     6.7 %     0.1 %     6.4 %

Net margin

      4.0 %     7.1 %     5.0 %     0.8 %     4.8 %

Expenses as percentage of revenues:

           

Technology and development

      5.2 %     5.0 %     4.7 %     5.3 %     4.9 %

Marketing

      19.4 %     19.6 %     23.2 %     19.8 %     22.2 %

General and administrative

      5.5 %     2.8 %     3.9 %     4.6 %     3.5 %

Gain on disposal of DVDs

      (0.2 )%     (0.3 )%     (0.5 )%     (0.2 )%     (0.6 )%
                                        

Total operating expenses

      29.9 %     27.1 %     31.3 %     29.5 %     30.0 %

Year-to-year change:

           

Total revenues

      23.0 %     45.9 %     48.2 %     35.9 %     47.1 %

Fulfillment

      15.9 %     22.8 %     32.7 %     27.3 %     28.0 %

Technology and development

      12.0 %     39.3 %     33.2 %     18.0 %     34.4 %

Marketing

      45.2 %     74.5 %     77.4 %     35.9 %     64.3 %

General and administrative

      80.8 %     8.7 %     4.3 %     53.3 %     11.4 %

Gain on disposal of DVDs

      (48.9 )%     731.0 %     194.3 %     (22.6 )%     191.3 %

Total operating expenses

      45.0 %     55.5 %     55.3 %     35.4 %     49.6 %