Professional Documents
Culture Documents
October 2
Dear Fello
ow Sharehold
ders,
net is transforming video e
The Intern entertainmen nt, stream by stream, conssumer by consumer, nation by
nation. Ouur opportunitty is to be one
e of the leadeers of this tra nsformation with the bestt streaming vvideo
subscriptiion service on
n the planet. The last few
w months, how wever, have bbeen difficult for sharehold
ders,
employee es, and most u unfortunatelyy, many mem mbers of Netfl ix. While wee dramaticallyy improved our
$7.99 unlimited stream ming service bby embracing new platform ms, simplifyin nterface, and more
ng our user‐in
than doubbling domestiic spending on streaming ccontent over 2010, we greeatly upset many domesticc
Netflix meembers with our significan nt DVD‐related pricing cha nges, and to a lesser degree, with the
proposed‐and‐now‐cancelled rebranding of our DVD service. In doing so, we’ve hurt o our hard‐earned
reputation, and stalledd our domestiic growth. But our long‐terrm streamingg opportunityy is as compellling
nd we are mo
as ever an oving forward as quickly ass we can to reepair our repu utation and reeturn to grow
wth.
(in millions exce
ept per share data) Q3 '09 Q4 '09 Q1 ''10 Q2 '10 Q3 '10 Q4
4 '10 Q1 '11 Q2 '11 Q3 '11
Domestic::
Streaming SSubscriptions 21.45
2
DVD Subscriiptions 1
13.93
Operating In
ncome $ 49 $ 53 $ 58 $ 77 $ 72 $ 88 $ 113 $ 124 $ 120
Y/Y Change 45% 39% 61% 45% 47% 66% 95% 61% 67%
Internatio
onal:
Subscription
ns ‐ ‐ ‐ ‐ 0.13 0
0.51 0.80 0.97 1.48
Revenue ‐ ‐ ‐ ‐ $ ‐ $ 4 $ 12 $ 19 $ 23
Global:
Revenue 494 $ 520 $ 553 $ 596 $ 719 $ 789 $ 822
$ 423 $ 445 $ 4
Y/Y Change 24% 24% 25% 27% 31% 3
34% 46% 52% 49%
Net Income $ 30 $ 31 $ 32 $ 44 $ 38 $ 47 $ 60 $ 68 $ 62
Y/Y Change 48% 35% 45% 38% 27% 5
52% 88% 55% 63%
Free Cash Flow $ 26 $ 30 $ 38 $ 34 $ 8 $ 51 $ 79 $ 60 $ 14
Buyback $ 130 $ 79 $ 1108 $ 45 $ 57 $ ‐ $ 109 $ 51 $ 40
Shares (FD) 57.9 55.5 544.8 54.3 53.9 5
54.2 54.2 53.9 53.9
1
DVD and
d Streamingg
We think that $7.99 fo or unlimited sttreaming andd $7.99 for unnlimited DVD are both veryy aggressive llow
prices, rellative to competition and tto the value o
of the servicees, and they aare the right p
place for Netfflix to
be in the long term. WWhat we misjuudged was ho ow quickly to move there. We compou unded the
problem w on about the rising cost of the expansio
with our lack of explanatio on of streaminng content, and
steady DV VD costs, so th
hat absent th
hat explanatioon, many percceived us as ggreedy. Finally, we annou unced
and then retracted a se eparate brand for DVD. W While this brannding inciden nt further dennted our
reputation, and caused d a temporaryy cancellationn surge, comppared to our price change,, its impact w was
relatively minor. Our pprimary issue
e is many of our long‐term members fellt shocked byy the pricing
changes, aand more of tthem have exxpressed thatt by cancellingg Netflix than n we expected d.
Because oof this, our revenue and prrofits in Q4 w will be lower thhan we had aanticipated, b
but we’ll remaain
profitable
e on a global b basis. In Q1’1
12 we’ll be lau
unching in thee UK and Irelaand, as we haad planned. FFor a
few quartters starting in Q1, we expect the costs of our entry into the UK aand Ireland w will push us to be
unprofitable on a global basis; that is, domestic profits will noot be large ennough to both h cover
onal investme
internatio ents and pay ffor global G&&A and Technoology & Deveelopment. Aftter launchingg the
UK and Ire eland, we will pause on op pening new in nternational mmarkets until we return to
o global
profitabiliity. We plan to do that byy increasing o
our global streeaming subsccriber base faster than we
increase o
our costs.
Investors and memberrs will be relie
eved to know we are donee with pricing changes, and
d that at $7.9
99
each for sstreaming and
d DVD we can n move forwaard for a long time.
Q3 Dom
mestic Resullts
We ended d the quarter with 21.4 miillion streaminng subscriptioons and 13.9 million DVD subscriptionss.
Unique do omestic subsccribers declin
ned to 23.8 million subscribbers, driven b
both by a high
her than expeected
level of caancellations aand a reductio
on in acquisitions driven b y the PR storm that engulfed our brandd and
its impactt on word‐of‐mouth. In spiite of this, wee continued too experience year‐over‐yeear growth in gross
2
additions,, acquiring 4.7
7 million new
w subscribers, or nearly 20%
% year‐over‐yyear growth. Not only waas
acquisition up compared to last yeaar, but SAC off $15 was commparable to Q
Q2’11 before the brand hitt, and
down 24% % from a yearr ago. New suubscribers are ming service.
e coming for our market‐leeading stream
Q4 Dom
mestic Outlo
ook
Looking at our domesttic streaming segment, we started the ccurrent quartter with somee subscribers who
were mosstly DVD users, but paying for both DVD D and streamiing and not uusing streaminng enough to
justify payying $7.99 forr it. Those su
ubscribers are
e cancelling sttreaming, which reduces rrevenue and
streamingg subscription ns. This canceellation wave was triggereed by the debit and credit ccard bills arriving
with our nnew prices. The wave peakked a few weeks ago and ccancellations are now steaadily decliningg.
At the sam
me time, we ccontinue to seee year‐over‐‐year growth in weekly grooss additions,, demonstrating
the contin
nued strengthh of the streaming value proposition. W We expect strreaming net aadditions will be
negative iin October du
ue to the canccellation wave referred to above, and aas the wave subsides and ggross
additions remain stronng, net additio
ons will be ab
bout flat in Noovember, andd strongly possitive in
December. Overall forr the quarter we expect slightly negativve streaming net additionss. Streaming
3
hours are continuing too climb, as members who use streaminng mostly stayy with Netflixx streaming. O
Our
streamingg hours year‐tto‐date are up over 3 time
es from a yearr ago, and sett new recordss most weekss.
New Do
omestic Con
ntent
Netflix SStreaming C
Content Qu
uality – 10xx of Starz
There aree various wayss to evaluate the content o of a video‐strreaming serviice. One wayy is to focus purely
on quantity, but that le
eads to the liccensing of tho
ousands of raarely watched d titles. At the other extreeme is
concentraating solely on
n quality, as m
measured by the number oof Oscar‐nom minated or Em mmy‐nominatted
titles we h
have. Instead, we think abbout the value e of our conteent as a functtion of how m much a given
movie or TTV series getss watched rellative to otheer titles, for hoow long and by how manyy members. FFrom
4
that persp be of less valuue to Netflix ssubscribers than “Pawn Sttars,”
pective, an Osscar‐nominatted film may b
because ssubs are watcching the reality show morre than the Osscar‐nominatted movie.
We have tthe Starz offe ering within o
our service, annd it is currenntly running aabout 6% of vviewing hourss
because wwe have adde ed so many otther movies aand TV showss (with no bias one way or the other in our
merchand dising). In othher words, 94 4% of the time e members sttream from N Netflix, they aare watching aa
non‐Starzz title. Includiing the Sony ffilms from Staarz, which Staarz removed ffrom Netflix sseveral months
ago, the 6
6% figure wou uld rise to abo
out 10%. From this perspeective, Netflixx has about teen times the
streamingg content seleection of full SStarz, in terms of what connsumers actually choose to o watch.
Using a similar techniqque, we have analyzed all tthe video conntent offered through Amaazon Prime,
including the TV prograams announcced but not ye et live. We h ave essentiallly all of this ccontent on Neetflix,
and that ccontent contrributes a small fraction of Netflix viewinng. Specificallly, the dupliccative Amazon
content thhat is available on Netflix rrepresents more than halff of hours view wed for only 2% of our
subscribers. Therefore e, when evaluuating Amazo on Prime as a competitive sstand‐alone o offering, this low
content seelection explaains why we h have not seen
n much usagee of Amazon Prime in our research.
use we think most Hulu Pl us subs are p
Hulu Plus is harder to aanalyze becau paying to get ccurrent seasoon TV
content, wwhich Netflix does not carry, such as this week’s SNLL clips, on theeir TV‐conneccted devices,
rather thaan paying for the Plus‐speccific content. In this sensee, Hulu Plus ccurrent seaso
on TV is just a
complementary conten nt model to u
us, like sports or news subsscriptions. O Our prior seasson TV offerinng is
far more ccomplete thaan Hulu Plus, aand our moviie content is vvastly larger tthan Hulu Plu us, but, again,, we
think mosst people who o pay for Hulu
u Plus are doiing so for lastt‐night’s TV episodes on th heir PS3, iPads,
and otherr devices.
Netflix is the Conte
ent Leader – but Video
o is not Mu
usic
Radio stattions and tele
evision netwoorks develope
ed with differ ent content licensing mod dels, and the
online evo
olution of mu usic and video
o streaming se
ervices to a laarge extent reeflects that leegacy.
With radio o, automatic,, non‐negotiaable, statutoryy music licenssing meant thhat there wouuld be no
exclusivityy over the mu
usic played byy different raddio stations. Clear Channeel, for examp
ple, doesn’t geet
Sony Mussic exclusivelyy. As music m
moved online from radio, t he music labeels and majorr music servicces –
Pandora, Rhapsody, Sp potify, iTunes, Amazon, an nd others – coontinued this non‐exclusive practice,
offering a nearly comp plete selection
n of songs.
5
We have d dramatically more content than any other subscripttion service or network, bu ut given the
existing licensing struccture of the caable network industry, thee total conten nt available w
will likely remaain
carved up p between Ne etflix, Showtimme, HBO, Hulu and others.. Two services can licensee jointly, or frrom
one anoth her, like Netfllix and Epix, w
where it is in ttheir mutual interest, but to date that has been the
exception n rather than the rule.
We don’t have to “beaat” Starz or otther networkss to succeed. In fact, we o
offer significant value to thhe
television licensing eco
osystem by crreating additional revenuee in the prior season windo ow for netwoorks,
which allo
ows them to iinvest in additional first ru
un content. W
We won’t havve every movie or TV seriess; but
we do proovide enough value that co onsumers also o want to subbscribe to Netflix. Any givven consumer will
have onlyy one of DirecTV or Comcast, say, for their video servvice. That is cclassic either‐‐or competition.
But with p
premium tele evision netwo
orks like Netflix, the more ggood experiences there arre, the more
have multiple channels froom which to gget enjoyment.
consumerrs are willing to spend to h
Internattional
We’re ple eased to report that we have over 1 million Canadiann members, aand we madee a small
contributiion profit in Q
Q3 in Canada.. We’re excited enough byy the opportu unity in Canadda that, over the
next year,, we are doub bling our quarterly content spending, sttarting by add ding in Q4 hitt feature films in
their first pay window,, such as “Truue Grit”, “Blacck Swan” and “The Chroniccles of Narniaa: Voyage of tthe
Dawn Treader”, along with considerable high pro ofile feature ffilms just com
ming out of th
heir first pay
window, aand premium m catalog film titles, as well as many TV series. By thhe time we’vee added all th his
great ente ertainment, wwe will have ccomparable content qualitty to what wee have in the U.S., and be
spending the populatio on‐adjusted eequivalent. Th his investmennt will push coontribution m
margin back under
in Canadaa for a few quarters, and our plan is to aachieve consiistent positivee contribution profit startiing in
Q3 of nexxt year, two yeears after ourr initial launch.
In early Se
eptember, we e launched Netflix in 43 coountries in Lattin America. Early resultss indicate that
member ccount at the e end of the year will be a litttle above Ca nada at the eend of 2010, w where we had d far
higher braand awarenesss from the sttart. Given tthat Latin Am erica has abo out 4x more b broadband
household ds than Canad da, there is lo
ots of room foor growth. WWe recently ad dded supportt for Android in
the regionn, with suppoort for Xbox and iOS to follow in comingg weeks, and are constantly adding new w
content. Now that we are serving h hundreds of thousands of Latin Americaans, we can m measure what is
getting ennjoyed a lot, aand what isn’t, and adjust our mix of coontent accord dingly. We are just beginn ning
in this maarket with a lo
ot to learn, annd a lot we caan improve ovver time, so itt’s too early tto tell whetheer we
will reach run‐rate break‐even within two years as we would like.
6
We annou unced this mo orning that w
we are launchiing in the UK and Ireland in Q1. The UK K is a large media
market with about 26 million house eholds. Abou ut 20 million hhouseholds hhave broadband Internet aand
video gam
me console pe enetration is vvery high. About 60% of hhouseholds subscribe to aan MVPD offeering
from eithe
er Sky or Virggin, comparedd to the rough hly 90% of U. S. and Canadian househollds that subsccribe
to an MVPPD. The UK mmarket is simiilar to Canadaa in that onlinne piracy use is reasonablyy small and neearly
everyone has a debit oor credit card,, unlike Latin America. In ggeneral, UK ISSP’s do not haave Canadian‐style
low broaddband usage ccaps. Over‐th he‐top video is more deveeloped in the UK, with greaater familiaritty
and usagee for catch‐upp‐TV than in C
Canada or the Player and 4oD.
e U.S., with suuch offerings as the BBC iP
TV Everyywhere Dueling Mode
els in the U.S.
We’ve wrritten before tthat authentication models for Internett access of caable network content would be
our eventtual primary ccompetitor. The first of th he two mode ls for authenttication is thaat subscriberss use
their MVP PD applicationn, such as DisshOnline, or CComcast Xfinitty, to access content onlin ne from laptoops,
tablets, phones, game consoles, Sm mart TVs, and Internet set‐ttops. The seccond of the tw wo models fo or
authentication is subsccribers use thhe cable TV ne etwork appliccations, such as HBO GO or WatchESPN N on
the iPad oor Roku or Sam msung TV. WWhichever mo odel wins viewwing share ovver time will cconfer a lot off
profit powwer on its owner, and the competition iis stimulatingg a lot of investment by bo oth MVPDs an nd
networks in TV Everyw where. In the long term, Sm mart TVs and tablets will b be similar, offfering a wide
uding Netflix.. It’s slightly better for us if those other
range of vvideo applicattions via the IInternet, inclu
applicatio e ESPN and HBO, because they are on eequal footingg with us. It’s
ons are also “cchannels” like
slightly worse for us if the other primary applicattions are EPG Gs like DishOn nline, and Xfinnity, because we
wouldn’t be in those EPGs. We rem main focused o on making ouur service onee of the best, in terms of
consumerr value and eaase of use, ass the market d develops.
Faceboo
ok / VPPA U
Update
We were thrilled to announce at Faacebook’s f8 cconference inn September o our new Faceebook integraation
ws Netflix subscribers in Caanada and Lattin America too connect theeir Netflix sub
that allow bscriptions with
their Face
ebook accoun nts. The Netfllix/Facebook integration eempowers Neetflix subscribers to share w what
they watcch on Netflix w
with their frie
ends on Facebbook and com mmunicate ab bout that con ntent. We’ve seen
strong connect rates inn Latin American and Canaada, but we a re in the early phase of integration in tthese
7
countries and we have e yet to see ju
ust how powe
erful an impacct this will havve on the con
nsumer
experiencce and our ind
dustry.
Just for Kids
Kids and ffamily contennt is a very important part of the Netflixx streaming o ng significant
offering, drivin
hours viewwed. We know that kids te end to have ddifferent viewwing behavior r from adults; namely, kidss love
to watch tthe same thin ng over and o over again. More importanntly, kids iden ntify with showws more by the
characters than by the e title. With thhis in mind, w
we launched aa new “Just fo or Kids” feature in July whiich
provides aa more intuitive and enjoyyable way for children to w watch all of thhe great age‐aappropriate TTV
shows and d movies available to watcch instantly frrom Netflix.
By clickingg on the “Justt For Kids” tab on the Netfflix website, kkids can find aa world of mo ovies and TV
shows suiitable for children 12 and u under, with kkid‐friendly geenres and sorrting by charaacters such ass
“Dora thee Explorer”, “PPhineas & Ferrb”, “iCarly”, “Caillou” andd “Thomas the Tank Enginee." This new
feature is just one morre way we are e improving oour UI and co nsumer expeerience to bettter connect
subscribers with movie es and TV sho ows they’ll lovve. “Just for KKids” is available on the PCC and Mac to
Netflix meembers with similar functionality to com me on the Wiii, iPad and m many other deevices in coming
months.
8
Free Cassh Flow
In Q3, FCFF of $13.8 milllion increased sharply yeaar‐over‐year ((77%), but siggnificantly trailed net incom
me of
$62 millio
on. Our Septe
ember Latin A America launcch, with a full quarter of caash paymentss but only one
month of amortization n, was a material contributtor to this gapp. In additionn, we had approximately $ $22
million in content paymments go out at the end off the quarter for content sstarting on the site in earlyy
October, increasing the e prepaid conntent on our bbalance shee t.
We expecct our FCF to ccontinue to laag net income
e for the nextt few quarterrs as our spen
nding on content
continuess to increase b
both domestiically and inte
ernationally.
Historically, we have always run a vvery lean capital structure,, returning alll “excess” cassh to sharehoolders
in the form
m of buybackks. We expectt to report a gglobal consoliidated net losss in Q1’12 ass well as to
9
consume cash as we laaunch the UK.. By pausing on further intternational expansion and d halting buyb
backs,
our current cash on haand is adequate to supportt the growth oof the busineess. As we haave done in th
he
past, we w
will continue to evaluate the appropriate cash level for the busin
ness.
Q4 Busin
ness Outloo
ok
Q4 2011 G
Guidance
Domesttic Streamin
ng:
Subscriptiions 20.0 m
m to 21.5 m
Revenue $462 m to $477 m
Contributtion Profit $30 m
m to $42 m
Domesttic DVD:
Subscriptiions 10.3 m
m to 11.3 m
Revenue $354 m to $368 m
Contributtion Profit $177 m to $192 m
Internaational:
Subscriptiions 1.6 m
m to 2.0 m
Revenue $25 m
m to $30 m
Contributtion Profit / (Lo
oss) ($70 m) to ($60m)
Consolidated Globaal:
Net Incom
me $19 m
m to $37 m
EPS $0.3
36 to $0.70
Summa
ary
We continnue to be welll positioned tto succeed in
n the large gloobal market fo
or streaming video. Consuumer
demand ffor unlimited, on‐demand movies and TTV shows streeamed over th he Internet keeeps growingg,
driven by increased broadband pen netration, the adoption of Smart TVs, annd increased video
consumpttion from lapttops, tablets, and phones. Moving forw ward, we are ffocused on coontinually
improvingg our service, by expandingg our streamiing content liibrary and enhancing our u user experien
nce,
to both bu
uild consume er trust and to
o stay ahead oof the compeetition.
Sincerely,
Reed Hasttings, CEO David W
Wells, CFO
10
Conferen
nce Call Q&A
A Session
The live w
webcast, and tthe replay, off the earningss Q&A sessionn can be acceessed at ir.nettflix.com.
IR Contacct: PPR Contact:
Ellie Merttz SSteve Swaseyy
VP, Financce & Investorr Relations VVP, Corporatee Communicaations
408 540‐33977 4408 540‐39477
Use of Non‐GAAP Measures
11
Forward‐‐Looking Stattements
This share eholder letterr contains cerrtain forward‐‐looking stateements within the meanin ng of the fedeeral
securities laws, including statementts regarding o our long‐termm opportunitiees and buildin ng back our bbrand,
subscriber additions, in nternational eexpansion, co ontribution prrofit and marrgin; internatiional segmen nt
performance, includingg Canadian co ontribution profit; free cassh flow and u usage of cash;; our subscribber
growth, re evenue, and ccontribution profit (loss) for both domeestic and inteernational opeerations as w well as
net incomme and earnin ngs per share for the fourth h quarter of 22011. The forrward‐lookingg statements in
this letterr are subject tto risks and uncertainties tthat could ca use actual ressults and eveents to differ,
including,, without limitation: our ab bility to attracct new subscrribers and rettain existing ssubscribers; oour
ability to ccompete effeectively; our aability to buildd back our br and; the conttinued availab bility of conteent
on terms and condition ns acceptablee to us; mainttenance and eexpansion of device platfo orms for instaant
streamingg; fluctuationss in consumer usage of ou ur service; dis ruption in serrvice on our wwebsite or wiith
third‐partty computer ssystems that help us operaate our servicce; competitio on and widesspread consum mer
adoption of different m modes of view wing in‐home e filmed enterrtainment. A d detailed discu
ussion of thesse
and otherr risks and uncertainties th hat could causse actual resuults and events to differ m materially from
m
such forwward‐looking sstatements is included in o our filings witth the Securitties and Exchaange Commisssion,
including our Annual R Report on Form 10‐K filed w with the Secuurities and Exchange Comm mission on
February 18, 2011. We e undertake n no obligation to update forrward‐lookingg statements to reflect eveents
or circumstances occurring after the e date of thiss press releasee.
12
Netflix, Incc.
Consolidatted Statements of Operations
(unaudited)
(in thousand
ds, except per shaare data)
Three Montths Ended Nine Months Ended
d
Septemb
ber 30, June 3
30, Septemb
ber 30, Septemb
ber 30, Septem ber 30,
201
11 2011 201 0 201
11 201
10
* Includess gain on disposaal of DVDs.
13
Netflix, In
nc.
Consolidaated Balance SSheets
(unauditedd)
(in thousan
nds, except sha re and par valu
ue data)
As of
September 30, December 31,
D
2011 2010
Assets
Current asssets:
Cash a nd cash equiva lents $ 159,199 $ 194,499
$
Short‐teerm investmentts 206,573 155,888
Currentt content librar y, net 705,398 181,006
Prepaid d content 77,146 62,217
Other ccurrent assets 41,797 43,621
Tootal current asssets 1,190,113 637,231
Content lib brary, net 570,210 180,973
Property a nd equipment, n net 143,993 128,570
Deferred taax assets 28,743 17,467
Other non‐‐current assets 28,499 17,826
Tootal assets $ 1,961,558 $
$ 982,067
Liabilities aand Stockholderrs' Equity
Current lia bilities:
Accoun nts payable $ 750,107 $ 222,824
$
Accrued d expenses 54,671 36,489
Currentt portion of leasse financing obligations 2,259 2,083
Deferreed revenue 160,929 127,183
Tootal current liab bilities 967,966 388,579
Long‐term d debt 200,000 200,000
Lease finan ncing obligation ns, excluding cu
urrent portion 32,400 34,123
Other non‐‐current liabilities 372,840 69,201
Tootal liabilities 1,573,206 691,903
Stockholdeers' equity:
Common stock, $0.001 p par value; 160,0000,000 shares
authorizeed at Septemberr 30, 2011 and D December 31, 2 010;
52,504,091 and 52,781,949 issued and d outstanding att
Septembeer 30, 2011 and d December 31, 2010, respectivvely 53 53
Additionaal paid‐in capittal ‐ 51,622
Accumulaated other comp prehensive incoome, net 588 750
Retained earnings 387,711 237,739
Tootal stockholdeers' equity 388,352 290,164
Tootal liabilities aand stockholders' equity $ 1,961,558 $
$ 982,067
14
Netflix, Inc.
Consolidated d Statements of Caash Flows
(unaudited)
(in thousandss)
Thrree Months Ended ed
Nine Months Ende
September 30, June 30, Sep
ptember 30, Septe
ember 30, Septem mber 30,
2011 2011 2010 2011 20
010
Cash flows froom operating activities:
Net income $ 62,460 $ 68,214 $ 37,967 $ 190,907 $ 113,758
1
Adjustments to reconcile net inc ome to net cash
provided bby operating activitiees:
Additionss to streaming conteent library (539,285) (612,595) (115,149) (1
1,344,187) (2
231,781)
Change i n streaming content liabilities 314,720 419,832 58,638 816,620 88,197
Amortiza tion of streaming co ontent library 187,446 144,466 44,568 417,849 93,091
Amortiza tion of DVD content library 23,000 24,000 32,578 73,990 111,490
1
Deprecia tion and amortizatio on of property, equip
pment and intangibl es 11,913 10,182 8,678 31,921 28,846
Stock‐bassed compensation exxpense 15,705 15,536 7,296 43,505 19,726
Excess taax benefits from stocck‐based compensatiion (11,761) (17,868) (16,093) (45,283) (34,699)
Other non‐cash items (1,745) (802) (1,754) (3,472) (7,814)
Deferred taxes (5,281) (3,927) 3,194 (14,190) (2,961)
Changes in operating assets and liabilities:
Prepaidd content (17,335) 14,787 (25,485) (14,928) (32,581)
Other ccurrent assets (8,578) 4,015 (3,374) 4,935 (12,037)
Other aaccounts payable (5,422) (4,465) (10,914) 4,948 1,246
Accrued expenses 20,920 17,941 18,003 61,531 39,666
Deferreed revenue 13,992 3,892 1,567 33,746 2,889
Other nnon‐current assets a nd liabilities (11,218) 3,184 2,507 (5,646) 2,648
Net cash provided by op perating activities 49,531 86,392 42,227 252,246 179,684
1
Cash flows froom investing activitie
es:
Acquisitions of DVD content libr ary (20,826) (19,065) (29,900) (62,010) (90,993)
Purchases off short‐term investm ments (7,673) (40,597) (15,379) (100,536) (73,169)
Proceeds froom sale of short‐term m investments 37 16,510 42,238 31,508 105,063
1
Proceeds froom maturities of short‐term investments 1,805 15,985 1,995 18,440 10,318
Purchases off property and equip pment (14,080) (8,626) (7,342) (39,026) (19,406)
Other assets (844) 844 2,782 1,419 10,289
Net cash used in investiing activities (41,581) (34,949) (5,606) (150,205) (57,898)
Cash flows froom financing activitie
es:
Principal pa yments of lease fina ncing obligations (526) (520) (470) (1,547) (1,296)
Proceeds froom issuance of comm mon stock 4,409 7,418 10,927 18,589 33,954
Excess tax beenefits from stock‐baased compensation 11,761 17,868 16,093 45,283 34,699
Repurchasess of common stock (39,602) (51,421) (57,390) (199,666) (2
210,259)
Net cash used in financ ing activities (23,958) (26,655) (30,840) (137,341) (1
142,902)
Net increase ((decrease) in cash an nd cash equivalents (16,008) 24,788 5,781 (35,300) (21,116)
Cash and cas h equivalents, beginning of period 175,207 150,419 107,327 194,499 134,224
1
Cash and cash h equivalents, end off period $ 159,199 $ 175,207 $ 113,108 $ 159,199 $ 113,108
1
Thrree Months Ended Nine Months Ende
ed
September 30, June 30, ptember 30,
Sep Septe
ember 30, Septem mber 30,
2011 2011 2010 2011 20
010
Non‐GAAP freee cash flow reconciliaation:
Net cash pro
ovided by operating aactivities $ 49,531 $ 86,392 $ 42,227 $ 252,246 $ 179,684
1
Acquisitions of DVD content libr ary (20,826) (19,065) (29,900) (62,010) (90,993)
Purchases off property and equippment (14,080) (8,626) (7,342) (39,026) (19,406)
Other assets (844) 844 2,782 1,419 10,289
Non‐GAAP frree cash flow $ 13,781 $ 59,545 $ 7,767 $ 152,629 $ 79,574
15
Netflix, Incc.
Other Dataa
(unaudited)
(in thousands, except percenntages, average m
monthly revenue per paying
subscriber aand subscriber aacquisition cost)
As o
of / Three Monthhs Ended
SSeptember 30, June 30, Septemb
ber 30,
2011 2011 2010
0
Domestic suubscriber informaation:
Subscribeers: beginning of period 24,594 22,797 15,001
1
Gross subbscriber additionns: during period 4,714 5,315 3,965
Gross suubscriber additioons year‐to‐year change 18.9% 733.7% 81.9%
Gross suubscriber additioons quarter‐to‐quuarter sequentia l change (11.3%) (155.6%) 29.6%
Less subsccriber cancellati ons: during perio
od (5,519) (3,518) (2,166)
(
Net subsc riber additions: dduring period (805) 1,797 1,799
Subscribeers: end of period
d 23,789 24,594 16,800
1
Subscri bers year‐to‐yea r change 41.6% 633.9% 51.2%
Subscri bers quarter‐to‐qquarter sequentiaal change (3.3%) 7
7.9% 12.0%
Free subscr ibers: end of per iod 946 1,331 937
Free subsccribers as percenntage of ending s ubscribers 4.0% 5
5.4% 5.6%
Paid subscrribers: end of perriod 22,843 23,263 15,863
1
Paid subs cribers year‐to‐yyear change 44.0% 599.6% 46.4%
Paid subs cribers quarter‐tto‐quarter sequential change (1.8%) 8
8.7% 8.8%
Average monthly revenue peer paying subscri ber $
$ 11.56 $ 111.49 $ 12.12
Domestic chhurn 6.3% 4
4.2% 3.8%
Domestic suubscriber acquisittion cost $
$ 15.25 $ 155.09 $ 20.03
Three Months Ended
SSeptember 30, June 30, Septemb
ber 30,
2011 2011 2010
0
Consolidate d margins:
Gross marrgin 34.7% 37
7.9% 37.7%
Operatingg margin 11.8% 14
4.6% 12.6%
Net margi n 7.6% 8
8.6% 6.9%
Consolidate d expenses as peercentage of reve
enues:
Technologgy and developmeent 8.5% 7
7.3% 7.6%
Marketingg 10.8% 12
2.0% 14.7%
General a nd administrativve 3.6% 4
4.0% 2.8%
Total opperating expensess 22.9% 23
3.3% 25.1%
Consolidate d year‐to‐year ch
hange:
Total reveenues 48.6% 5 1.7% 30.7%
Cost of subscription 61.4% 6 1.4% 25.4%
Fulfillmennt expenses 24.5% 244.7% 23.4%
Technologgy and developmeent 65.0% 522.8% 40.3%
Marketingg 9.7% 277.4% 38.7%
General a nd administrativve 87.3% 1022.5% 60.0%
Total opperating expensess 35.3% 433.9% 41.4%
16
Netflix, Incc.
Segment In nformation
(unaudited)
(in thousand
ds)
As of / Three Monthhs Ended As of / N
Nine Months End
ded
September 300, June 30, September 3 0, Septemberr 30, Septemb ber 30,
2011 2011 2010 2011 201 0
Domestic
Free subbscribers at end oof period 946
6 1,331 93
37 946 937
Paid subscribers at end of period 22,843 3 23,263 15,86 63 22,,843 15,863
1
Total subsscribers at end off period 23,789 9 24,594 16,80 00 23,,789 16,800
1
Revenue $ 799,152 2 $ 769,714 $ 553,21 19 $ 2,275,,140 $ 1,56 66,703
Cost of revvenues and markketing expenses 579,720 0 556,719 423,01 13 1,655,,828 1,1994,861
Contributiion profit* 219,432 2 212,995 130,20 06 619,,312 37
71,842
Other operating expenses 99,272
2 88,535 58,01
11 261,,710 16
63,960
Segment ooperating income $ 120,160 0 $ 124,460 $ 72,19 95 $ 357,,602 $ 2007,882
Internationaal**
Free subbscribers at end oof period 491
1 110 13 33 491 133
Paid subscribers at end of period 989
9 857 ‐ 989 ‐
Total subsscribers at end off period 1,4800 967 13 33 1,,480 133
Revenue $ 22,687 7 $ 18,896 $ ‐ $ 53,,862 $ ‐
Cost of revvenues and markketing expenses 46,005
5 28,242 2,6994 97,,268 2,694
Contributiion profit (loss)* (23,3188) (9,346 ) (2,6994) (43,,406) (2,694)
(
Consolidate d
Free subbscribers at end oof period 1,437
7 1,441 1,07
70 1,,437 1,070
Paid subscribers at end of period 23,8322 24,120 15,8663 23,,832 15,863
1
Total subsscribers at end off period 25,2699 25,561 16,9333 25,,269 16,933
1
Revenue $ 821,839 9 $ 788,610 $ 553,21 19 $ 2,329,,002 $ 1,56 66,703
Cost of revvenues and markketing expenses 625,725 5 584,961 425,70 07 1,753,,096 1,19 97,555
Contributiion profit* $ 196,114 4 203,649 127,51 12 575,,906 36 69,148
Other operating expenses 99,2722 88,535 58,0111 261,,710 16 63,960
Operatingg income 96,8422 $ 115,114 $ 69,50 01 $ 314,,196 $ 20 05,188
Other incoome (expense) (3,219
9) (4,290 ) (4,09
92) (11,,509) (112,051)
Provision for income taxess 31,1633 42,610 27,4442 111,,780 79,379
7
Net Incomme $ 62,460 0 $ 68,214 $ 37,96 67 $ 190,,907 $ 11 13,758
17