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Netflix Announces Q3 2010 Financial Results

Subscribers - 16.9 million

Revenue - $553.2 million

GAAP Net Income - $38.0 million

GAAP EPS - $0.70 per diluted share

Netflix, Inc. Logo. (PRNewsFoto/Netflix)

News provided by

Netflix, Inc.

Oct 20, 2010, 04:05 ET

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

(Logo: http://photos.prnewswire.com/prnh/20101014/SF81638LOGO)

(Logo: http://www.newscom.com/cgi-bin/prnh/20101014/SF81638LOGO)

“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.

Netflix, Inc.










Consolidated Statements of Operations










(unaudited)










(in thousands, except per share data)













Three Months Ended


Nine Months Ended




September 30,


June 30,


September 30,


September 30,


September 30,




2010


2010


2009


2010


2009













Revenues

$           553,219


$519,819


$           423,120


$        1,566,703


$        1,225,727

Cost of revenues:











Subscription

292,406


265,387


233,091


817,353


677,863


Fulfillment expenses *

52,063


49,547


42,183


149,212


125,922



Total cost of revenues

344,469


314,934


275,274


966,565


803,785

Gross profit

208,750


204,885


147,846


600,138


421,942

Operating expenses:











Technology and development *

42,108


37,863


30,014


117,370


81,333


Marketing *

81,238


74,533


58,556


230,990


167,029


General and administrative *

17,135


17,119


11,543


51,447


37,809


Gain on disposal of DVDs

(1,232)


(1,972)


(1,604)


(4,857)


(2,819)



Total operating expenses

139,249


127,543


98,509


394,950


283,352

Operating income

69,501


77,342


49,337


205,188


138,590

Other income (expense):











Interest expense

(4,945)


(4,893)


(674)


(14,797)


(2,018)


Interest and other income

853


921


1,808


2,746


4,284

Income before income taxes

65,409


73,370


50,471


193,137


140,856

Provision for income taxes

27,442


29,851


20,330


79,379


55,909

Net income

$             37,967


$  43,519


$             30,141


$           113,758


$             84,947

Net income per share:











Basic

$                0.73


$     0.83


$                0.54


$                2.17


$                1.48


Diluted

$                0.70


$     0.80


$                0.52


$                2.09


$                1.43

Weighted average common shares outstanding:











Basic

52,142


52,486


56,146


52,510


57,576


Diluted

53,931


54,324


57,938


54,341


59,427













*Stock-based compensation included in










expense line items:











Fulfillment expenses

$                  323


$       307


$                    99


$                  806


$                  321


Technology and development

2,694


2,376


1,169


6,939


3,430


Marketing

777


756


452


2,176


1,353


General and administrative

3,502


3,489


1,512


9,805


4,538













Reconciliation of Non-GAAP Financial Measures










(unaudited)










Non-GAAP net income reconciliation:










GAAP net income

$             37,967


$  43,519


$             30,141


$           113,758


$             84,947


Stock-based compensation

7,296


6,928


3,232


19,726


9,642


Income tax effect of stock-based compensation

(3,064)


(2,820)


(1,302)


(8,118)


(3,833)

Non-GAAP net income

$             42,199


$  47,627


$             32,071


$           125,366


$             90,756

Non-GAAP net income per share:











Basic

$                0.81


$     0.91


$                0.57


$                2.39


$                1.58


Diluted

$                0.78


$     0.88


$                0.55


$                2.31


$                1.53

Weighted average common shares outstanding:











Basic

52,142


52,486


56,146


52,510


57,576


Diluted

53,931


54,324


57,938


54,341


59,427

Netflix, Inc.




Consolidated Balance Sheets




(unaudited)




(in thousands, except share and par value data)










As of







September 30,


December 31,







2010


2009

Assets





Current assets:






Cash and cash equivalents

$           113,108


$         134,224



Short-term investments

143,705


186,018



Current content library, net

138,389


37,329



Prepaid content

59,322


26,741



Other current assets

37,723


26,701






Total current assets

492,247


411,013

Content library, net

120,047


108,810

Property and equipment, net

125,057


131,653

Deferred tax assets

19,219


15,958

Other non-current assets

13,713


12,300






Total assets

$           770,283


$         679,734

Liabilities and Stockholders' Equity




Current liabilities:






Accounts payable

$           170,120


$           92,542



Accrued expenses

36,974


33,387



Current portion of lease financing obligations

2,027


1,410



Deferred revenue

102,986


100,097






Total current liabilities

312,107


227,436

Long-term debt

200,000


200,000

Lease financing obligations, excluding current portion

34,659


36,572

Other non-current liabilities

31,542


16,583






Total liabilities

578,308


480,591

Stockholders' equity:





Common stock, $0.001 par value; 160,000,000 shares authorized at
September 30, 2010 and December 31, 2009; 52,257,495 and
53,440,073 issued and outstanding at September 30, 2010 and
December 31, 2009, respectively

52


53


Accumulated other comprehensive income, net

1,279


273


Retained earnings

190,644


198,817






Total stockholders' equity

191,975


199,143






Total liabilities and stockholders' equity

$           770,283


$         679,734

Netflix, Inc.










Consolidated Statements of Cash Flows










(unaudited)










(in thousands)

















Three Months Ended


Nine Months Ended








September 30,


June 30,


September 30,


September 30,


September 30,








2010


2010


2009


2010


2009

Cash flows from operating activities:











Net income

$             37,967


$   43,519


$             30,141


$           113,758


$             84,947


Adjustments to reconcile net income to net cash












provided by operating activities:













Acquisition of streaming content library

(115,149)


(66,157)


(9,998)


(231,781)


(41,432)




Amortization of content library

77,146


65,143


56,690


204,581


159,229




Depreciation and amortization of property, equipment and intangibles

8,678


9,309


9,618


28,846


27,806




Amortization of discounts and premiums on investments

200


236


126


670


439




Amortization of debt issuance costs

140


137


-


375


-




Stock-based compensation expense

7,296


6,928


3,232


19,726


9,642




Excess tax benefits from stock-based compensation

(16,093)


(11,182)


(1,600)


(34,699)


(9,099)




Loss on disposal of property and equipment

254


-


-


254


254




Gain on sale of short-term investments

(206)


(215)


(984)


(685)


(1,455)




Gain on disposal of DVDs

(2,142)


(3,058)


(2,491)


(8,428)


(5,030)




Deferred taxes

3,194


(3,394)


(71)


(2,961)


4,710




Changes in operating assets and liabilities:














Prepaid content

(25,485)


(2,133)


107


(32,581)


2,592





Other current assets

(3,374)


(9,211)


7,518


(12,037)


(4,203)





Accounts payable

41,692


19,706


(13,173)


78,738


(11,150)





Accrued expenses

18,003


7,917


2,175


39,666


6,272





Deferred revenue

1,567


1,310


(1,372)


2,889


(4,004)





Other assets and liabilities

8,539


1,397


(1,607)


13,353


(272)







Net cash provided by operating activities

42,227


60,252


78,311


179,684


219,246

Cash flows from investing activities:











Acquisitions of DVD content library

(29,900)


(24,191)


(46,273)


(90,993)


(135,996)


Purchases of short-term investments

(15,379)


(21,795)


(21,006)


(73,169)


(102,159)


Proceeds from sale of short-term investments

42,238


32,055


85,904


105,063


130,669


Proceeds from maturities of short-term investments

1,995


4,310


3,480


10,318


30,985


Purchases of property and equipment

(7,342)


(5,671)


(9,994)


(19,406)


(23,499)


Acquisitions of intangible assets

(375)


-


-


(505)


(200)


Proceeds from sale of DVDs

3,109


3,815


3,345


10,908


7,230


Other assets

48


10


134


(114)


143







Net cash (used in) provided by investing activities

(5,606)


(11,467)


15,590


(57,898)


(92,827)

Cash flows from financing activities:











Principal payments of lease financing obligations

(470)


(465)


(294)


(1,296)


(858)


Proceeds from issuance of common stock

10,927


13,109


2,725


33,954


26,092


Excess tax benefits from stock-based compensation

16,093


11,182


1,600


34,699


9,099


Repurchases of common stock

(57,390)


(45,145)


(129,686)


(210,259)


(244,916)







Net cash used in financing activities

(30,840)


(21,319)


(125,655)


(142,902)


(210,583)

Net increase (decrease) in cash and cash equivalents

5,781


27,466


(31,754)


(21,116)


(84,164)

Cash and cash equivalents, beginning of period

107,327


79,861


87,471


134,224


139,881

Cash and cash equivalents, end of period

$           113,108


$ 107,327


$             55,717


$           113,108


$             55,717
























Three Months Ended


Nine Months Ended








September 30,


June 30,


September 30,


September 30,


September 30,








2010


2010


2009


2010


2009

Non-GAAP free cash flow reconciliation:











Net cash provided by operating activities

$             42,227


$   60,252


$             78,311


$           179,684


$           219,246


Acquisitions of DVD content library

(29,900)


(24,191)


(46,273)


(90,993)


(135,996)


Purchases of property and equipment

(7,342)


(5,671)


(9,994)


(19,406)


(23,499)


Acquisitions of intangible assets

(375)


-


-


(505)


(200)


Proceeds from sale of DVDs

3,109


3,815


3,345


10,908


7,230


Other assets

48


10


134


(114)


143


Non-GAAP free cash flow

$               7,767


$   34,215


$             25,523


$             79,574


$             66,924
























Twelve Months Ended












September 30,


June 30,


September 30,












2010


2010


2009





Non-GAAP free cash flow reconciliation:











Net cash provided by operating activities

$           285,501


$ 321,585


$           311,346






Acquisitions of DVD content library

(148,041)


(164,414)


(174,291)






Purchases of property and equipment

(41,839)


(44,491)


(30,970)






Acquisitions of intangible assets

(505)


(130)


(200)






Proceeds from sale of DVDs

14,842


15,078


11,925






Other assets

(186)


(100)


111






Non-GAAP free cash flow

$           109,772


$ 127,528


$           117,921





Netflix, Inc.






Consolidated Other Data






(unaudited)






(in thousands, except percentages, average monthly revenue per paying subscriber, average monthly gross profit per paying subscriber and subscriber acquisition cost)









As of / Three Months Ended




September 30,


June 30,


September 30,




2010


2010


2009

Subscriber information:







Subscribers: beginning of period

15,001


13,967


10,599


Gross subscriber additions: during period

4,101


3,059


2,180



Gross subscriber additions year-to-year change

88.1%


58.0%


42.7%



Gross subscriber additions quarter-to-quarter sequential change

34.1%


(12.4%)


12.6%


Less subscriber cancellations: during period

(2,169)


(2,025)


(1,670)


Subscribers: end of period

16,933


15,001


11,109


Subscribers year-to-year change

52.4%


41.5%


28.1%


Subscribers quarter-to-quarter sequential change

12.9%


7.4%


4.8%

Free subscribers: end of period

1,070


424


274


Free subscribers as percentage of ending subscribers

6.3%


2.8%


2.5%

Paid subscribers: end of period

15,863


14,577


10,835


Paid subscribers year-to-year change

46.4%


40.5%


27.6%


Paid subscribers quarter-to-quarter sequential change

8.8%


7.0%


4.4%

Average monthly revenue per paying subscriber

$              12.12


$  12.29


$              13.30

Average monthly gross profit per paying subscriber

$                4.57


$    4.84


$                4.65

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie

66%


61%


41%

Household penetration - Bay Area

27%


26%


21%

Household penetration - Rest of Country

14%


13%


10%

Churn

3.8%


4.0%


4.4%

Subscriber acquisition cost

$              19.81


$  24.37


$              26.86

Margins:







Gross margin

37.7%


39.4%


34.9%


Operating margin

12.6%


14.9%


11.6%


Net margin

6.9%


8.4%


7.1%

Expenses as percentage of revenues:







Technology and development

7.6%


7.3%


7.1%


Marketing

14.7%


14.3%


13.8%


General and administrative

3.1%


3.3%


2.7%


Gain on disposal of DVDs

(0.2%)


(0.4%)


(0.3%)



Total operating expenses

25.2%


24.5%


23.3%

Year-to-year change:







Total revenues

30.7%


27.2%


24.0%


Cost of subscription

25.4%


16.7%


24.9%


Fulfillment expenses

23.4%


18.2%


11.2%


Technology and development

40.3%


39.6%


28.4%


Marketing

38.7%


61.2%


19.0%


General and administrative

48.4%


29.2%


(1.7%)


Gain on disposal of DVDs

(23.2%)


1571.2%


(1.5%)



Total operating expenses

41.4%


47.5%


19.1%

SOURCE Netflix, Inc.

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