Netflix Financial Report For Q3, Up A Third From This Time Last Year

While the new addition of a streaming-only subscription plan may not show any financial effects on the video renting giant that is Netflix, their third quarter financial results are still quite interesting.

According to Netflix, Q3 of 2010 is the company’s fourth straight quarter housing more than a million new subscribers.   Not only that, but the company has finally gone as far as to say that they are ‘a streaming company that also offers DVD-by-mail.’   At this point, the company calls 16,933,000 different people subscribers, with only 6 percent of them being free subscribers. They also grossed $553.2 million in new revenue.

Personally, the fact that the company is grossing nearly a third higher revenue from this time last year, has to be related to the onslaught of streaming content the company offers.   It will be interesting to see how their new streaming-only subscription either lowers their overall revenue, from people switching subscriptions, or if it will bring more users to company who are looking to get into the world of streaming.   Also, the rumored price cut that Hulu Plus will be seeing may, however unlikely, have an impact on this too.

What do you think?

Source: Netflix


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

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

‘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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