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Netflix Announces Q1 2010 Results

Netflix, Inc. announced the results for its first quarter ended March 31, 2010.

According to the statement, Netflix earned $32.3 million ($0.59/share), compared with $22.4 million ($0.37/share) in the same period in 2009. First quarter revenue increase to $493.7 million, up from $394.1 million in the previous year.

For more information visit: www.netflix.com


Edited press release follows:

Netflix Announces Q1 2010 Financial Results

Subscribers – 14.0 million
Revenue – $493.7 million
GAAP Net Income – $32.3 million
GAAP EPS – $0.59 per diluted share

LOS GATOS, Calif., April 21 — Netflix, Inc. (Nasdaq: NFLX) today reported results for the first quarter ended March 31, 2010.

“Our growth continued to accelerate in the first quarter, with record net subscriber additions and record-low subscriber acquisition cost,” said Netflix co-founder and CEO Reed Hastings.  “It is clear that our performance, and the overall appeal of the Netflix service, is being driven by subscribers watching instantly.  On that score, we reached a milestone in the quarter as more than half of all members – 55 percent and growing – enjoyed movies and TV episodes streamed from Netflix over the Internet.”

First-Quarter 2010 Financial Highlights
Subscribers.  Netflix ended the first quarter of 2010 with approximately 13,967,000 total subscribers, representing 35 percent year-over-year growth from 10,310,000 total subscribers at the end of the first quarter of 2009 and 14 percent sequential growth from 12,268,000 subscribers at the end of the fourth quarter of 2009.

Net subscriber change in the quarter was an increase of 1,699,000 compared to an increase of 920,000 for the same period of 2009 and an increase of 1,159,000 for the fourth quarter of 2009.

Gross subscriber additions for the quarter totaled 3,492,000, representing 45 percent year-over-year growth from 2,413,000 gross subscriber additions in the first quarter of 2009 and 25 percent quarter-over-quarter growth from 2,803,000 gross subscriber additions in the fourth quarter of 2009.

Of the 13,967,000 total subscribers at quarter end, 98 percent, or 13,622,000, were paid subscribers.  The other 2 percent, or 345,000, were free subscribers.  Paid subscribers represented 98 percent of total subscribers at the end of the first quarter of 2009 and 97 percent at the end of the fourth quarter of 2009.

Revenue for the first quarter of 2010 was $493.7 million, representing 25 percent year-over-year growth from $394.1 million for the first quarter of 2009, and 11 percent sequential growth from $444.5 million for the fourth quarter of 2009.

Gross margin(1) for the first quarter of 2010 was 37.8 percent compared to 34.2 percent for the first quarter of 2009 and 38.0 percent for the fourth quarter of 2009.

GAAP net income for the first quarter of 2010 was $32.3 million, or $0.59 per diluted share compared to GAAP net income of $22.4 million, or $0.37 per diluted share, for the first quarter of 2009 and GAAP net income of $30.9 million, or $0.56 per diluted share, for the fourth quarter of 2009.  GAAP net income grew 44 percent on a year-over-year basis and GAAP EPS grew 59 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 first quarter of 2010 was 55 percent compared to 36 percent for the same period of 2009 and 48 percent for the fourth quarter of 2009.

Subscriber acquisition cost(2) for the first quarter of 2010 was $21.54 per gross subscriber addition compared to $25.79 for the same period of 2009 and $25.23 for the fourth quarter of 2009.

Churn(3) for the first quarter of 2010 was 3.8 percent compared to 4.2 percent for the first quarter of 2009 and 3.9 percent for the fourth quarter of 2009.  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 first quarter of 2010 was $35.8 million compared to $15.1 million for the first quarter of 2009 and $30.2 million for the fourth quarter of 2009.

Last twelve-month free cash flow for the first quarter of 2010 was $117.8 million compared to $105.0 million for the first quarter of 2009 and $97.1 million for the fourth quarter of 2009.

Cash provided by operating activities for the first quarter of 2010 was $75.4 million compared to $65.6 million for the first quarter of 2009 and $105.8 million for the fourth quarter of 2009.

Business Outlook
The Company’s performance expectations for the second quarter of 2010 and full-year 2010 are as follows:
Second-Quarter 2010
•    Ending subscribers of 14.7 million to 15.0 million
•    Revenue of $517 million to $525 million
•    GAAP net income of $34 million to $40 million
•    GAAP EPS of $0.62 to $0.73 per diluted share

Full-Year 2010
•    Ending subscribers of 16.5 million to 17.3 million, up from 15.5 million to 16.3 million
•    Revenue of $2.11 billion to $2.16 billion, up from $2.05 billion to $2.11 billion
•    GAAP net income of $132 million to $144 million, up from $125 million to $137 million
•    GAAP EPS of $2.41 to $2.63 per diluted share, up from $2.28 to $2.50 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 ir@netflix.com. (Please note this new email address).  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 Steve Swasey at (408) 540-3947 or sswasey@netflix.com.

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 April 21, 2010 through midnight on April 24, 2010. To listen to the replay, call (706) 645-9291, conference ID 67441533.

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.  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, cash flows from investment in business 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
With more than 13 million members, Netflix, Inc.  (Nasdaq: NFLX) is the world’s largest subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail.  For $8.99 a month, Netflix members can instantly watch unlimited TV episodes and movies streamed to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes.  With Netflix, there are never any due dates or late fees.  Members can select from a growing library of titles that can be watched instantly and a vast array of titles on DVD.  Among the large and expanding base of devices that can stream movies and TV episodes from Netflix right to members’ TVs are Microsoft’s Xbox 360 and Sony’s PS3 game consoles and Nintendo’s Wii console; Blu-ray disc players from Samsung, LG and Insignia; Internet TVs from LG, Sony and VIZIO; the Roku digital video player and TiVo digital video recorders; and Apple’s iPad tablet.  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 our subscriber growth, revenue, GAAP net income and earnings per share for the second 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.

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