Netflix Announces Q3 2010 Financial Results

LOS GATOS, Calif., Oct. 20 /PRNewswire-FirstCall/ -- Netflix, Inc. (Nasdaq: NFLX) today reported results for the third quarter ended September 30, 2010.

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“Q3 represents our fourth consecutive quarter of more than one million net subscriber additions.  This growth is clearly driven by the strength of our streaming offering.  In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail,” said Reed Hastings, Netflix co-founder and CEO.  “At the same time, the introduction of our streaming offering in Canada in late September has provided us with very encouraging signs regarding the potential for the Netflix service internationally.”

Third-Quarter 2010 Financial Highlights

Subscribers.  Netflix ended the third quarter of 2010 with approximately 16,933,000 total subscribers, representing 52 percent year-over-year growth from 11,109,000 total subscribers at the end of the third quarter of 2009 and 13 percent sequential growth from 15,001,000 subscribers at the end of the second quarter of 2010.

Net subscriber change in the quarter was an increase of 1,932,000 compared to an increase of 510,000 for the same period of 2009 and an increase of 1,034,000 for the second quarter of 2010.

Gross subscriber additions for the quarter totaled 4,101,000, representing 88 percent year-over-year growth from 2,180,000 gross subscriber additions in the third quarter of 2009 and 34 percent quarter-over-quarter increase from 3,059,000 gross subscriber additions in the second quarter of 2010.

Of the 16,933,000 total subscribers at quarter end, 94 percent, or 15,863,000, were paid subscribers.  The other 6 percent, or 1,070,000, were free subscribers.  Paid subscribers represented 98 percent of total subscribers at the end of the third quarter of 2009 and 97 percent at the end of the second quarter of 2010.

Revenue for the third quarter of 2010 was $553.2 million, representing 31 percent year-over-year growth from $423.1 million for the third quarter of 2009, and 6 percent sequential growth from $519.8 million for the second quarter of 2010.

Gross margin(1) for the third quarter of 2010 was 37.7 percent compared to 34.9 percent for the third quarter of 2009 and 39.4 percent for the second quarter of 2010.    

GAAP net income for the third quarter of 2010 was $38.0 million, or $0.70 per diluted share compared to GAAP net income of $30.1 million, or $0.52 per diluted share, for the third quarter of 2009 and GAAP net income of $43.5 million, or $0.80 per diluted share, for the second quarter of 2010.  GAAP net income grew 26 percent on a year-over-year basis and GAAP EPS grew 35 percent on a year-over-year basis.  

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the third quarter of 2010 was 66 percent compared to 41 percent for the same period of 2009 and 61 percent for the second quarter of 2010.  In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD.  With that transition in the business from mostly DVD to mostly streaming, this will be the last quarter the company will report this metric.

Subscriber acquisition cost(2) for the third quarter of 2010 was $19.81 per gross subscriber addition compared to $26.86 for the same period of 2009 and $24.37 for the second quarter of 2010.    

Churn(3) for the third quarter of 2010 was 3.8 percent compared to 4.4 percent for the third quarter of 2009 and 4.0 percent for the second quarter of 2010.  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 third quarter of 2010 was $7.8 million compared to $25.5 million for the third quarter of 2009 and $34.2 million for the second quarter of 2010.    

Trailing twelve-month free cash flow for the third quarter of 2010 was $109.8 million compared to $117.9 million for the third quarter of 2009 and $127.5 million for the second quarter of 2010.

Cash provided by operating activities for the third quarter of 2010 was $42.2 million compared to $78.3 million for the third quarter of 2009 and $60.3 million for the second quarter of 2010.    

Business Outlook

The Company’s performance expectations for the fourth quarter of 2010 and full-year 2010 are as follows:

Fourth-Quarter 2010

• Ending subscribers of 19.0 million to 19.7 million, up from 17.7 million to 18.5 million
• Revenue of $586 million to $598 million, versus $580 million to $596 million
• GAAP net income of $32 million to $40 million, unchanged
• GAAP EPS of $0.59 to $0.74 per diluted share, unchanged

Full-Year 2010

• Ending subscribers of 19.0 million to 19.7 million, up from 17.7 million to 18.5 million
• Revenue of $2.15 billion to $2.16 billion, versus $2.14 billion to $2.16 billion
• GAAP net income of $146 million to $154 million, versus $141 million to $156 million
• GAAP EPS of $2.68 to $2.83 per diluted share, up from $2.58 to $2.86 per diluted share

Earnings Q&A Session

In conjunction with this earnings press release, the Company has posted management’s commentary to its Web site at http://ir.netflix.com.  Netflix management will host a live Q&A session at 3:00 p.m. Pacific Time to discuss the Company’s financial results and business outlook, with questions submitted via email.  Please email your questions to [email protected].  The company will read the questions aloud on the call and respond to as many questions as possible.  All media inquiries should be directed to Ken Ross at (408) 540-3931 or [email protected].

A live webcast and the replay of the earnings Q&A session can be accessed on the investor relations section of the Netflix website at http://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from 6:00 p.m. Pacific Time on October 20, 2010 through midnight on October 25, 2010. To listen to the replay, call (706) 645-9291, conference ID 87600137.

Use of Non-GAAP Measures

This press release and its attachments include reference to non-GAAP financial measures of free cash flow and non-GAAP net income.  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.   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, repurchase stock and for certain other 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

With more than 16 million members in the United States and Canada, Netflix, Inc. [Nasdaq: NFLX] is the world’s leading Internet subscription service for enjoying movies and TV shows.  For $8.99 a month, Netflix members in the U.S. can instantly watch unlimited movies and TV episodes streaming right to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes.  In Canada, streaming unlimited movies and TV shows from Netflix is available for $7.99 a month.  Among the large and expanding base of devices streaming from Netflix are Microsoft’s Xbox 360, Nintendo’s Wii and Sony’s PS3 consoles; Blu-ray disc players from Best Buy’s Insignia brand, LG and Samsung; Internet TVs from LG, Samsung, Sony and VIZIO; the Roku digital video player and TiVo digital video recorders; and Apple’s iPhone, iPad and iPod touch.  All of these devices are available in the U.S. and a growing number are available in Canada.  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 subscribers usage of our streaming service, our subscriber growth, revenue, GAAP net income and earnings per share for the fourth quarter of 2010 and the full-year 2010. 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; 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; maintenance and expansion of device platforms for instant streaming; continued weakness in 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 22, 2010.  We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

(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 Condensed Consolidated Statements of Operations divided by total gross subscriber additions during the quarter.

(3) Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then 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.

SOURCE Netflix, Inc.