EX-99.1 2 dex991.htm PRESS RELEASE Press Release

Exhibit 99.1

 

LOGO

 

FOR IMMEDIATE RELEASE    IR CONTACT:    Deborah Crawford
Thursday, July 15, 2004         Director of Investor Relations
          408 317-3712
     PR CONTACT:    Lynn Brinton
          Director of Corporate Communications
          408 317-3726

 

Netflix Announces GAAP Net Income of $2.9 million and

Non-GAAP Net Income of $7.0 million for Q2 2004

 

Los Gatos, Calif. – July 15, 2004 – Netflix (Nasdaq: NFLX) today reported results for the second quarter ended June 30, 2004.

 

“A driver of our strong performance this quarter — the tenth consecutive quarter of more than 70 percent year-over-year revenue and subscriber growth — is the fact that Netflix continues to represent the world’s best movie rental experience for millions of Americans,” said Reed Hastings, founder and CEO. “We are especially pleased that this growth continues at $22 a month, a price increase last quarter that optimizes both growth and profitability.”

 

  · Revenue was $120.3 million compared to $63.2 million for the same period in 2003, up 90 percent year over year
  · GAAP Net Income was $2.9 million, compared to a GAAP Net Loss of $5.8 million the previous quarter
  · Free Cash Flow was $6.3 million, up 45 percent compared to the same period in 2003. GAAP net cash provided by operating activities was $32.0 million, up 35 percent compared to the same period in 2003

 

Second Quarter 2004 Financial Highlights

 

Revenue for the second quarter was a record $120.3 million, up 90 percent compared to $63.2 million for the second quarter of 2003, and up 20 percent compared to $100.4 million for the first quarter of 2004. This represents the tenth consecutive quarter of year over year revenue growth greater than 70 percent.

 

GAAP Net Income (Loss). GAAP net income for the second quarter was $2.9 million, or a profit of $0.04 per diluted share, compared to a GAAP net income of $3.3 million, or a profit of $0.05 per diluted share, for the second quarter of 2003 and a GAAP net loss of $5.8 million for the first quarter of 2004, or a loss of $0.11 per diluted share. GAAP net income was above the

mid-point of management’s guidance for the quarter. The increase in income reflects a 10 percentage point decline in marketing expense as a percentage of revenue.

 

Non-GAAP Net Income (Loss). Non-GAAP net income was $7.0 million, or a profit of $0.11 per diluted share, for the second quarter of 2004 compared to Non-GAAP net income of $5.0 million, or $0.08 per diluted share for the second quarter of 2003 and Non-GAAP net loss was $1.4 million, or a loss of $0.03 per diluted share, for the first quarter of 2004. Non-GAAP net income (loss) equals net income (loss) on a GAAP basis before stock-based compensation expense.

 

Free cash flow1 for the second quarter of 2004 was $6.3 million or 5.2 percent of revenue, up 45 percent from $4.3 million in the second quarter of 2003 and down 30 percent from $9.0 million in the first quarter of 2004. This is the Company’s eleventh consecutive quarter of positive free cash flow. Cash provided by operating activities for the second quarter of 2004 was $32.0 million, up 35 percent from $23.6 million in the second quarter of 2003 and down 5 percent from $33.8 million for the first quarter of 2004.

 

Gross margin for the second quarter was 42.0 percent, at the high end of the range of the Company’s guidance of 40 to 42 percent and, as expected, down from 43.6 percent in the first quarter of 2004. Gross margin last quarter included a 1.3 percent favorable impact as a result of non-recurring credits during the quarter. Excluding non-recurring credits, gross margin would have been 42.3 percent last quarter. In the second quarter of 2004, gross margin benefited from a monthly slight decline in movie rentals per average paying subscriber to 6.6 discs from 6.7 discs in the prior quarter. The resulting decline in postage and packaging expense was offset by an increase in content costs as a percent of revenue.

 

Subscribers. Netflix ended the second quarter of 2004 with approximately 2,093,000 total subscribers. During the quarter Netflix acquired 583,000 new trial subscribers, a 78 percent year-over-year increase from the 327,000 new trial subscribers acquired in the second quarter of 2003 and a sequential decline of 23 percent from the 760,000 new trial subscribers acquired in the first quarter of 2004. Despite the seasonal decline in subscriber growth, new trial subscribers grew at double last year’s Q2 year over year growth rate. This is the second consecutive quarter in which trial subscriber growth doubled compared with last year’s new trial growth rate.

 

Subscriber acquisition cost2 for the second quarter was $35.12 per new-trial subscriber compared to a cost of $30.45 for the second quarter of 2003 and unchanged from the first quarter of 2004. For the third quarter of 2004, the Company expects subscriber acquisition cost to rise to a range of $37 to $39 per new-trial subscriber due to increased spending on television advertising during the third quarter and decreased on-line spending in response to third-party on-line advertising rate increases during the second quarter.

 

Churn3 for the second quarter of 2004 was 5.6 percent as compared to 5.6 percent in the second quarter of 2003 and 4.7 percent in the first quarter of 2004. After increasing immediately following the April 15th announcement of the June 15th price increase, the subscriber cancellation rate recovered and since late May, has returned to the rate and the pattern the Company

 

1 Free cash flow is defined as cash flows from operating activities less cash flows used in investing activities excluding purchases and sales of short-term investments.
2 Subscriber acquisition cost is defined as the total marketing expense on the Company’s Statement of Operations divided by total gross subscriber additions during the quarter.
3 Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months

experienced in the comparable period last year. Churn includes free trial subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

 

Business Outlook

 

Guidance for the third quarter is:

 

Consolidated-

  · Ending subscribers of 2,150 to 2,350 thousand
  · Revenue of $141 to $145 million
  · GAAP net income of $6.7 to $10.2 million
  · Non-GAAP net income of $10.2 to $13.7 million

 

US Domestic-

  · Gross margin of 43 to 45 percent
  · SAC of $37 to $39
  · Churn of 4.8 to 5.6 percent

 

Guidance for the fourth quarter is:

 

Consolidated-

  · Ending subscribers of 2,400 to 2,700 thousand
  · Revenue of $150 to $160 million
  · GAAP net income of $8.8 to $14.8 million
  · Non-GAAP net income of $12.5 to $18.5 million

 

US Domestic-

  · Gross margin of 43.5 to 45.5 percent
  · SAC of $37 to $39
  · Churn of 4.6 to 5.4 percent

 

The Company’s revised guidance for the full year of 2004 is:

 

Consolidated-

  · Revenue of $511 to $525 million from $485 to $535 million
  · GAAP net income of $12.6 to $22.1 million from $10.5 to $18.5 million (the Company’s guidance includes the cost of international expansion)
  · Non-GAAP net income of $28.4 to $37.9 million from $26.5 to $34.5 million

 

GAAP and Non-GAAP net income guidance includes an estimated net loss of approximately $2.0 to $3.0 million in Q3 and $2.0 to $3.0 million in Q4 of 2004 related to our planned international expansion in the UK.

 

Float and Trading Plans

 

The Company estimates the public float at approximately 44,431,219 shares as of June 30, 2004, up 2 percent from 43,521,526 shares as of March 31, 2004, based on registered shares held in street name with the Depository Trust and Clearing Corporation. No outstanding shares are subject to a lock-up agreement of any kind. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All such purchases or sales are made pursuant to the terms of 10b5-1 Trading Plans approved by the Company and generally adopted no less than three months prior to the first date of sale under such plan.

Earnings Call

 

The Netflix earnings call will be webcast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed at http://ir.netflix.com. Following the conclusion of the webcast, a replay of the call will be available via Netflix’s website at http://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from 5:00 p.m. Pacific Time on July 15, 2004 through July 21, 2004. To listen to a replay, call (719) 457-0820, access code 102221. The Company also plans to include discussion of its business outlook in the conference call.

 

Use of Non-GAAP Measures

 

Management believes that Non-GAAP net income (loss) 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 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 (loss) 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. Management believes that gross margin and subscriber acquisition cost guidance for the U.S. business in the third and fourth quarters are useful measures because they give insight to investors with respect to the ongoing operations of the Company’s primary business and allow for an equivalent comparison to prior results. Furthermore, there is no reconciliation to consolidated GAAP measures for gross margin and subscriber acquisition cost as the Company has no finalized line-item detail with respect to its costs for the international expansion.

 

About Netflix

 

Netflix (Nasdaq: NFLX) is the world’s largest online movie rental service, providing more than two million subscribers access to over 20,000 DVD titles. For $21.99 a month, Netflix subscribers rent as many DVDs as they want, and keep them as long as they want, with three movies out at a time. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by first-class mail from regional shipping centers located throughout the United States. Netflix can reach more than 80 percent of its subscribers with generally next business day delivery. The Company provides subscribers extensive information about DVD movies, including critic reviews, member reviews, online trailers, ratings, and personalized movie recommendations. For more information, visit 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, revenues, GAAP net income (loss), Non-GAAP net income (loss), gross margin, subscriber acquisition cost and Churn for the remaining quarters and full year of 2004. This press release also contains forward-looking statements regarding our anticipated net loss in connection with international expansion. 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: long-term negative impacts to Churn, subscriber acquisition or other aspects of our business arising out of our subscription service price increase; our ability to manage our growth, in particular managing our subscriber acquisition cost as well as the mix between revenue sharing titles and titles not subject to revenue

sharing that are delivered to our subscribers; our ability to attract new subscribers and retain existing subscribers; changes in pricing and availability for advertising space; fluctuations in consumer usage of our service, risks associated with our plan to expand into international markets, including unforeseen cost and management distraction, customer spending on DVD players, DVDs and related products; competition; disruption in service on our website or with our computer systems; deterioration of the U.S. economy or conditions specific to online commerce or the filmed entertainment industry; conditions that effect our delivery through the U.S. Postal Service, including increases in first class postage; increases in the costs of acquiring DVDs; 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 SEC on February 27, 2004. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

Netflix, Inc.

Statements of Operations

(unaudited)

(in thousands, except per share data)

 

     Three Months Ended
     Six Months Ended
  
     June 30,
2003
     March 31,
2004
    

June 30,

2004

     June 30,
2003
     June 30,
2004
  

Revenues:

                                         

Subscription

    $ 63,071     $ 99,823     $ 119,710     $ 118,352     $ 219,533  

Sales

      116       547       611       504       1,158  
    
 
 
 
 

Total revenues

      63,187       100,370       120,321       118,856       220,691  

Cost of revenues:

                                         

Subscription

      35,148       56,444       69,604       65,076       126,048  

Sales

      93       183       184       172       367  
    
 
 
 
 

Total cost of revenues

      35,241       56,627       69,788       65,248       126,415  
    
 
 
 
 

Gross profit

      27,946       43,743       50,533       53,608       94,276  

Operating expenses:

                                         

Fulfillment

      7,221       10,790       14,373       13,604       25,163  

Technology and development

      4,123       5,039       5,652       8,306       10,691  

Marketing

      9,957       26,693       20,477       23,164       47,170  

General and administrative

      2,093       3,136       3,280       4,341       6,416  

Stock-based compensation

      1,704       4,435       4,134       4,110       8,569  
    
 
 
 
 

Total operating expenses

      25,098       50,093       47,916       53,525       98,009  
    
 
 
 
 

Operating income (loss)

      2,848       (6,350 )     2,617       83       (3,733 )

Other income (expense):

                                         

Interest and other income

      560       591       304       1,141       895  

Interest and other expense

      (95 )     (31 )     (30 )     (286 )     (61 )
    
 
 
 
 

Net income (loss)

    $ 3,313     $ (5,790 )   $ 2,891     $ 938     $ (2,899 )
    
 
 
 
 

Net income (loss) per share:

                                         

Basic

    $ .07     $ (.11 )   $ .06     $ .02     $ (.06 )
    
 
 
 
 

Diluted

    $ .05     $ (.11 )   $ .04     $ .02     $ (.06 )
    
 
 
 
 

Weighted-average common shares outstanding:

                                         

Basic

      47,296       51,282       51,898       46,385       51,590  
    
 
 
 
 

Diluted

      61,624       51,282       64,975       60,272       51,590  
    
 
 
 
 

Non-GAAP net income (loss) reconciliation:

                                         

Net income (loss)

    $ 3,313     $ (5,790 )   $ 2,891     $ 938     $ (2,899 )

Add back:

                                         

Stock-based compensation

      1,704       4,435       4,134       4,110       8,569  
    
 
 
 
 

Non-GAAP net income (loss)

    $ 5,017     $ (1,355 )   $ 7,025     $ 5,048     $ 5,670  
    
 
 
 
 

Non-GAAP net income (loss) per share:

                                         

Basic

    $ 0.11     $ (.03 )   $ .14     $ .11     $ .11  
    
 
 
 
 

Diluted

    $ 0.08     $ (.03 )   $ .11     $ .08     $ .09  
    
 
 
 
 

Weighted-average common shares outstanding:

                                         

Basic

      47,296       51,282       51,898       46,385       51,590  
    
 
 
 
 

Diluted

      61,624       51,282       64,975       60,272       64,907  
    
 
 
 
 

Netflix, Inc.

Balance Sheets

(unaudited)

(in thousands, except share and per share data)

 

     As of
  
     December 31,
2003
     June 30,
2004
  

Assets

                 

Current assets:

                 

Cash and cash equivalents

    $ 89,894     $ 153,444  

Short-term investments

      45,297       —    

Prepaid expenses

      2,231       2,422  

Prepaid revenue sharing expenses

      905       2,214  

Other current assets

      619       641  
    
 

Total current assets

      138,946       158,721  

DVD library, net

      22,238       30,256  

Intangible assets, net

      2,948       1,868  

Property and equipment, net

      9,772       11,053  

Deposits

      1,272       1,481  

Other assets

      836       814  
    
 

Total assets

    $ 176,012     $ 204,193  
    
 

Liabilities and Stockholders’ Equity

                 

Current liabilities:

                 

Accounts payable

    $ 32,654     $ 42,552  

Accrued expenses

      11,625       13,852  

Deferred revenue

      18,324       25,251  

Current portion of capital lease obligations

      416       253  
    
 

Total current liabilities

      63,019       81,908  

Deferred rent

      241       379  

Capital lease obligations, less current portion

      44       —    
    
 

Total liabilities

      63,304       82,287  

Stockholders’ equity:

                 

Common stock, $0.001 par value; 80,000,000 and 160,000,000 shares authorized at December 31, 2003 and June 30, 2004, respectively; 50,849,370 and 52,121,300 shares issued and outstanding at December 31, 2003 and June 30, 2004, respectively

      51       52  

Additional paid-in capital

      270,836       282,278  

Deferred stock-based compensation

      (5,482 )     (4,232 )

Accumulated other comprehensive income

      596       —    

Accumulated deficit

      (153,293 )     (156,192 )
    
 

Total stockholders’ equity

      112,708       121,906  
    
 

Total liabilities and stockholders’ equity

    $ 176,012     $ 204,193  
    
 

Netflix, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)

 

     Three Months Ended
     Six Months Ended
  
     June 30,
2003
     March 31,
2004
     June 30,
2004
     June 30,
2003
     June 30,
2004
  

Cash flows from operating activities:

                                         

Net income (loss)

    $ 3,313     $ (5,790 )   $ 2,891     $ 938     $ (2,899 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                                         

Depreciation of property and equipment

      1,140       1,252       1,323       2,473       2,575  

Amortization of DVD library

      9,392       18,127       21,141       16,012       39,268  

Amortization of intangible assets

      808       626       454       1,617       1,080  

Stock-based compensation expense

      1,704       4,435       4,134       4,110       8,569  

Loss on disposal of short-term investments

      —         —         274       —         274  

Gain on disposal of DVDs

      (94 )     (364 )     (427 )     (461 )     (791 )

Non-cash interest expense

      36       11       11       68       22  

Changes in operating assets and liabilities:

                                         

Prepaid expenses and other current assets

      (398 )     999       (2,521 )     205       (1,522 )

Accounts payable

      5,791       10,529       (631 )     7,659       9,898  

Accrued expenses

      769       836       1,391       1,192       2,227  

Deferred revenue

      1,167       3,172       3,755       2,651       6,927  

Deferred rent

      (8 )     (33 )     171       (17 )     138  
    
 
 
 
 

Net cash provided by operating activities

      23,620       33,800       31,966       36,447       65,766  
    
 
 
 
 

Cash flows from investing activities:

                                         

Purchases of short-term investments

      (363 )     (364 )     (222 )     (743 )     (586 )

Proceeds from sale of short-term investments

      —         —         45,013       —         45,013  

Purchases of property and equipment

      (2,400 )     (1,808 )     (2,048 )     (2,961 )     (3,856 )

Acquisitions of DVD library

      (17,027 )     (23,570 )     (24,083 )     (23,436 )     (47,653 )

Proceeds from sale of DVDs

      116       547       611       504       1,158  

Deposits and other assets

      20       (19 )     (168 )     (773 )     (187 )
    
 
 
 
 

Net cash provided by (used in) investing activities

      (19,654 )     (25,214 )     19,103       (27,409 )     (6,111 )
    
 
 
 
 

Cash flows from financing activities:

                                         

Proceeds from issuance of common stock

      1,496       1,819       2,305       3,045       4,124  

Principal payments on capital lease and other obligations

      (261 )     (111 )     (118 )     (668 )     (229 )
    
 
 
 
 

Net cash provided by financing activities

      1,235       1,708       2,187       2,377       3,895  
    
 
 
 
 

Net increase in cash and cash equivalents

      5,201       10,294       53,256       11,415       63,550  

Cash and cash equivalents, beginning of period

      66,028       89,894       100,188       59,814       89,894  
    
 
 
 
 

Cash and cash equivalents, end of period

    $ 71,229     $ 100,188     $ 153,444     $ 71,229     $ 153,444  
    
 
 
 
 

Non-GAAP free cash flow reconciliation:

                                         

Net cash provided by operating activities

    $ 23,620     $ 33,800     $ 31,966     $ 36,447     $ 65,766  

Purchases of property and equipment

      (2,400 )     (1,808 )     (2,048 )     (2,961 )     (3,856 )

Acquisitions of DVD library

      (17,027 )     (23,570 )     (24,083 )     (23,436 )     (47,653 )

Proceeds from sale of DVDs

      116       547       611       504       1,158  

Deposits and other assets

      20       (19 )     (168 )     (773 )     (187 )
    
 
 
 
 

Non-GAAP free cash flow

    $ 4,329     $ 8,950     $ 6,278     $ 9,781     $ 15,228  
    
 
 
 
 

Netflix, Inc.

Other Data

(unaudited)

(in thousands, except percentages and subscriber acquisition cost)

 

    

As of /

Three Months Ended

    

As of /

Six Months Ended

  
     June 30,
2003
     March 31,
2004
     June 30,
2004
     June 30,
2003
     June 30,
2004
  

Subscriber information:

                                         

Subscribers: beginning of period

      1,052       1,487       1,932       857       1,487  

New trial subscribers: during period

      327       760       583       744       1,343  

New trial subscribers year-to-year change

      39 %     82 %     78 %     36 %     81 %

New trial subscribers quarter-to-quarter sequential change

      (22 )%     71 %     (23 )%     —         —    

Less subscriber cancellations: during period

      (232 )     (315 )     (422 )     (454 )     (737 )

Subscribers: end of period

      1,147       1,932       2,093       1,147       2,093  

Subscribers year-to-year change

      71 %     84 %     82 %     71 %     82 %

Subscribers quarter-to-quarter sequential change

      9 %     30 %     8 %     9 %     8 %

Free subscribers: end of period

      46       90       69       46       69  

Free subscribers as percentage of ending subscribers

      4 %     5 %     3 %     4 %     3 %

Paid subscribers: end of period

      1,101       1,842       2,024       1,101       2,024  

Paid subscribers year-to-year change

      74 %     83 %     84 %     74 %     84 %

Paid subscribers quarter-to-quarter sequential change

      9 %     30 %     10 %     9 %     10 %

Churn

      5.6 %     4.7 %     5.6 %     —         —    

Subscriber acquisition cost

    $ 30.45     $ 35.12     $ 35.12     $ 31.13     $ 35.12  

Margins:

                                         

Gross margin

      44.2 %     43.6 %     42.0 %     45.1 %     42.7 %

Operating margin

      4.5 %     (6.3 )%     2.2 %     0.1 %     (1.7 )%

Net margin

      5.2 %     (5.8 )%     2.4 %     0.8 %     (1.3 )%

Expenses as percentage of revenues:

                                         

Fulfillment

      11.4 %     10.8 %     11.9 %     11.4 %     11.4 %

Technology and development

      6.5 %     5.0 %     4.7 %     7.0 %     4.8 %

Marketing

      15.8 %     26.6 %     17.0 %     19.5 %     21.4 %

General and administrative

      3.3 %     3.1 %     2.7 %     3.7 %     2.9 %
    
 
 
 
 

Operating expenses before stock-based compensation

      37.0 %     45.5 %     36.3 %     41.6 %     40.5 %

Stock-based compensation

      2.7 %     4.4 %     3.4 %     3.4 %     3.9 %
    
 
 
 
 

Total operating expenses

      39.7 %     49.9 %     39.7 %     45.0 %     44.4 %
    
 
 
 
 

Year-to-year change:

                                         

Total revenues

      73.8 %     80.3 %     90.4 %     77.7 %     85.7 %

Fulfillment

      48.8 %     69.0 %     99.0 %     51.0 %     85.0 %

Technology and development

      17.2 %     20.5 %     37.1 %     24.0 %     28.7 %

Marketing

      23.6 %     102.1 %     105.7 %     44.8 %     103.6 %

General and administrative

      27.8 %     39.5 %     56.7 %     47.3 %     47.8 %

Operating expenses before stock-based compensation

      29.5 %     75.5 %     87.2 %     42.6 %     81.0 %

Stock-based compensation

      (29.9 %)     84.3 %     142.6 %     17.7 %     108.5 %

Total operating expenses

      22.5 %     76.2 %     90.9 %     40.3 %     83.1 %

Netflix, Inc.

Non-GAAP Guidance Reconciliation Schedule

(unaudited)

(in thousands)

 

     Third Quarter, 2004
Guidance Range

Non-GAAP net income reconciliation:

              

Net income

    $ 6,700    $ 10,200

Add back:

              

Stock-based compensation

      3,500      3,500
    
  

Non-GAAP net income

    $ 10,200    $ 13,700
    
  
     Fourth Quarter, 2004
Guidance Range

Non-GAAP net income reconciliation:

              

Net income

    $ 8,800    $ 14,800

Add back:

              

Stock-based compensation

      3,700      3,700
    
  

Non-GAAP net income

    $ 12,500    $ 18,500
    
  
     Full Year, 2004
Guidance Range

Non-GAAP net income reconciliation:

              

Net income

    $ 12,600    $ 22,100

Add back:

              

Stock-based compensation

      15,800      15,800
    
  

Non-GAAP net income

    $ 28,400    $ 37,900