 |
Search -
Finance Home -
Yahoo! -
Help |  |
|
Search -
Finance Home -
Yahoo! -
Help | |
|
Quotes & Info
|
| NFLX > SEC Filings for NFLX > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to: statements regarding the breadth of content choices available to us, our competitive advantage, the continued popularity of the DVD format, expectations on the growth of Internet delivery of content, and our liquidity. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on February 25, 2009 and the other Quarterly Reports on Form 10-Q to be filed by us in 2009.
We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q.
Overview
Our Business
With more than 10 million subscribers, we are the largest online movie rental subscription service in the United States. We offer a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. We provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices. Subscribers select titles at our Web site aided by our proprietary recommendation service and merchandising tools. Subscribers can:
• Receive DVDs by U.S. mail and return them to us at their convenience using our prepaid mailers. After a DVD has been returned, we mail the next available DVD in a subscriber's queue.
• Watch streaming content without commercial interruption on personal computers ("PCs"), Intel-based Macintosh computers ("Macs") and televisions ("TVs"). The viewing experience is enabled by Netflix controlled software that can run on a variety of devices. These devices include PCs, Macs, Internet connected Blu-ray players, such as those manufactured by LG Electronics and Samsung, set-top boxes, such as TiVo and the Roku Player, game consoles, such as Microsoft's Xbox 360, and planned for later this year, TVs from Vizio and LG Electronics.
Our core strategy is to grow a large subscription business consisting of DVD by mail and streaming content. We offer over 100,000 titles on DVD. In comparison, the 12,000 content choices available for streaming are relatively limited. We expect to substantially broaden the content choices as more content becomes available to us. Until such time, by bundling DVD and streaming as part of the Netflix subscription, we are able to offer subscribers a uniquely comprehensive selection of movies
for one low monthly price. We believe this creates a competitive advantage as compared to a streaming only subscription service. This advantage will diminish over time as more content becomes available over the Internet from competing services, by which time we expect to have further developed our other advantages such as brand, distribution, and our proprietary merchandising platform. Despite the growing popularity of Internet delivered content, we expect that standard definition DVD, along with its high definition successor, Blu-ray (collectively referred to in this Quarterly Report as "DVD"), will continue to be the primary means by which most Netflix subscribers view content for the foreseeable future. However, at some point in the future, we expect that Internet delivery of content directly to the home will surpass DVD.
Key Business Metrics
Management periodically reviews certain key business metrics within the context of our articulated performance goals in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The key business metrics include the following:
• Churn: 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. Management reviews this metric to evaluate whether we are retaining our existing subscribers in accordance with our business plans.
• Subscriber Acquisition Cost: Subscriber acquisition cost is defined as total marketing expense divided by total gross subscriber additions. Management reviews this metric to evaluate how effective our marketing programs are in acquiring new subscribers on an economical basis in the context of estimated subscriber lifetime value.
• Gross Margin: Management reviews gross margin to monitor variable costs and operating efficiency.
Management believes it is useful to monitor these metrics together and not individually as management does not make business decisions based upon any single metric. Please see "Results of Operations" below for further discussion on these key business metrics.
Performance Highlights
The following represents our performance highlights for the three months ended
March 31, 2009, December 31, 2008 and March 31, 2008:
Three Months Ended
March 31, December 31, March 31,
2009 2008 2008
(in thousands , except per share data,
percentages and subscriber acquisition cost)
Revenues $ 394,098 $ 359,595 $ 326,183
Net income 22,363 22,732 13,344
Net income per share-diluted $ 0.37 $ 0.38 $ 0.21
Total subscribers at end of period 10,310 9,390 8,243
Churn 4.2 % 4.2 % 3.9 %
Subscriber acquisition cost $ 25.79 $ 26.67 $ 29.48
Gross margin 34.2 % 35.2 % 31.7 %
|
Critical Accounting Policies and Estimates
There have been no significant changes during the three months ended March 31, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
Results of Operations
The following table sets forth, for the periods presented, the line items in our condensed consolidated statements of operations as a percentage of total revenues. The information contained in the table below should be read in conjunction with the condensed consolidated financial statements, notes to the condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q.
Three Months Ended
March 31, December 31, March 31,
2009 2008 2008
Revenues 100.0 % 100.0 % 100.0 %
Cost of revenues:
Subscription 54.6 % 53.9 % 57.4 %
Fulfillment expenses 11.2 % 10.9 % 10.9 %
Total cost of revenues 65.8 % 64.8 % 68.3 %
Gross profit 34.2 % 35.2 % 31.7 %
Operating expenses:
Technology and development 6.1 % 6.7 % 6.2 %
Marketing 15.8 % 15.5 % 16.8 %
General and administrative 3.3 % 3.0 % 4.2 %
Gain on disposal of DVDs (0.2 )% (0.5 )% (0.2 )%
Total operating expenses 25.0 % 24.7 % 27.0 %
Operating income 9.2 % 10.5 % 4.7 %
Other income (expense):
Interest expense on lease financing
obligations (0.2 )% (0.2 )% (0.1 )%
Interest and other income (expense) 0.5 % 0.3 % 2.3 %
Income before income taxes 9.5 % 10.6 % 6.9 %
Provision for income taxes 3.8 % 4.3 % 2.8 %
Net income 5.7 % 6.3 % 4.1 %
|
Revenues
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands except percentages and average monthly revenue
per paying subscriber)
Revenues $ 394,098 $ 359,595 $ 326,183 20.8 % 9.6 %
Other data:
Average number of paying subscribers 9,640 8,827 7,714 25.0 % 9.2 %
Average monthly revenue per paying
subscriber $ 13.63 $ 13.58 $ 14.09 (3.3 )% 0.4 %
|
We currently generate all of our revenues in the United States. We derive substantially all of our revenues from monthly subscription fees and recognize subscription revenues ratably over each subscriber's monthly subscription period. We record refunds to subscribers as a reduction of revenues.
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in our revenues during the three months ended March 31, 2009 as compared to the same prior-year period was primarily a result of the substantial growth in the average number of paying subscribers. This increase was partly offset by a decline in the average monthly revenue per paying subscriber, resulting from the growing popularity of our lower priced subscription plans.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in our revenues during the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily a result of the growth in the average number of paying subscribers.
The following table presents our ending subscriber information:
As of
March 31, December 31, March 31,
2009 2008 2008
(in thousands, except percentages)
Free subscribers 194 226 141
As a percentage of total subscribers 1.9 % 2.4 % 1.7 %
Paid subscribers 10,116 9,164 8,102
As a percentage of total subscribers 98.1 % 97.6 % 98.3 %
Total subscribers 10,310 9,390 8,243
Cost of Revenues
|
Subscription
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages)
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in cost of subscription revenues for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to the following factors:
• The number of DVDs mailed to paying subscribers increased 17%, which was driven by a 25% increase in the number of average paying subscribers, partially offset by a decline in monthly DVD rentals per average paying subscriber attributed to the growing popularity of our lower priced plans.
• Postage and packaging expenses increased by 20%. This was primarily attributable to an increase in the number of DVDs mailed to paying subscribers and to an increase in the rates of first class postage in May 2008.
• Content expenses increased by 10%. This increase was primarily attributable to increased investments in streaming content.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in cost of subscription revenues for the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to the following factors:
• The number of DVDs mailed to paying subscribers increased 16%, which was driven by a 9% increase in the number of average paying subscribers and an increase in monthly DVD rentals per average paying subscriber attributed to a seasonal increase in disc usage.
• Postage and packaging expenses increased by 16%. This increase was primarily attributable to an increase in the number of DVDs mailed to paying subscribers and the monthly DVD rentals per average paying subscriber due to a seasonal increase in disc usage.
• Content expenses increased by 6%. This increase was primarily attributable to a seasonal increase in content acquisitions.
Fulfillment Expenses
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages)
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in fulfillment expenses for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to an increase in personnel-related costs resulting from the higher volume of activities in our shipping centers and customer service location, coupled with higher credit card fees as a result of the growth in the average number of paying subscribers. In addition, the increase in fulfillment expenses was attributable to an increase in facility-related costs resulting from the addition of new shipping centers and the relocation of our central receiving and storage center.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in fulfillment expenses for the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to an increase in personnel-related costs resulting from the higher volume of activities in our shipping centers due to a seasonal increase in disc usage. In addition, the increase in fulfillment expenses was attributable to an increase in facility-related costs resulting from the relocation of our central receiving and storage center.
Gross Margin
Three Months Ended
March 31, December 31, March 31,
2009 2008 2008
(in thousands, except percentages)
Gross profit $ 134,830 $ 126,749 $ 103,378
Gross margin 34.2 % 35.2 % 31.7 %
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in gross margin for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to the popularity of our lower priced plans, which have higher gross margins. In addition, our margins continue to benefit from increased utilization of catalog titles resulting from ongoing improvements in our merchandising and recommendation systems.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The decrease in gross margin for the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to an increase in postage and packaging expenses resulting from an increase in monthly DVD rentals per average paying subscriber due to a seasonal increase in disc usage.
Technology and Development
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages)
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in technology and development expenses for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to an increase in personnel-related costs due to growth in headcount and expenses related to the development of solutions for streaming content and continued improvements in our service.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
Technology and development expenses during the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 were relatively flat.
Marketing
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages and subscriber acquisition cost)
Marketing $ 62,242 $ 55,617 $ 54,895 13.4 % 11.9 %
As a percentage of revenues 15.8 % 15.5 % 16.8 %
Other data:
Gross subscriber additions 2,413 2,085 1,862 29.6 % 15.7 %
Subscriber acquisition cost $ 25.79 $ 26.67 $ 29.48 (12.5 )% (3.3 )%
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The increase in marketing expenses for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to an increase in marketing program spending, primarily in consumer electronic partner programs and online advertising. Subscriber acquisition cost decreased for the three months ended March 31, 2009 as compared to the same prior-year period primarily due to strong performance in all marketing channels coupled with strong organic subscriber growth.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in marketing expenses during the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to an increase in marketing program spending, primarily in online advertising. Subscriber acquisition cost decreased for the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 primarily due to strong performance in all marketing channels coupled with strong organic subscriber growth.
General and Administrative
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages)
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The decrease in general and administrative expenses for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to a decrease in personnel-related costs due to a decrease in headcount offset by an increase in costs related to legal proceedings.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in general and administrative expenses during the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to an increase in costs related to legal proceedings.
Interest and Other Income (Expense)
Three Months Ended Change
March 31, December 31, March 31, Q1'09 vs. Q1'09 vs.
2009 2008 2008 Q1'08 Q4'08
(in thousands, except percentages)
|
Three months ended March 31, 2009 as compared to the three months ended March 31, 2008
The decrease in interest and other income (expense) for the three months ended March 31, 2009 as compared with the same prior-year period was primarily attributable to gains realized from the sale of short-term investments and higher interest and dividends in the first quarter of 2008.
Three months ended March 31, 2009 as compared to the three months ended December 31, 2008
The increase in interest and other income (expense) during the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to gains realized from the sale of short-term investments in the first quarter of 2009.
Income Taxes
Three Months Ended
March 31, December 31, March 31,
2009 2008 2008
(in thousands, except percentages)
Provision for income taxes $ 15,048 $ 15,364 $ 9,203
Effective tax rate 40.2 % 40.3 % 40.8 %
|
Our effective tax rate for the first quarter of 2009 was 40.2% and differed from the federal statutory rate due primarily to state taxes offset by the Federal and California R&D tax credit recorded during the quarter. The decrease in our effective tax rate for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to the impact of stock-based compensation adjustments. The effective tax rate for the three months ended March 31, 2009 differed from the effective tax rate for the period ended December 31, 2008 due to a discrete tax benefit recorded for Federal and State tax credits.
Liquidity and Capital Resources
We have generated net cash from operations during each quarter since the second quarter of 2001. Many factors will impact our ability to continue to generate and grow cash from our operations including, but not limited to, the number of subscribers who sign up for our service and the growth or reduction in our subscriber base. In addition, we may have or otherwise choose to lower our prices and increase our marketing expenses in order to grow faster or respond to competition. Although we currently anticipate that cash flows from operations, together with our available funds, will be sufficient to meet our cash needs for the foreseeable future, we may require or choose to obtain additional financing. Our ability to obtain financing will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing.
Our primary source of liquidity has been cash from operations, which consists mainly of net income adjusted for non-cash items such as amortization of our . . .
|
|
