July 24, 2002

Netflix Announces Record Second Quarter 2002 Financial Results

• Revenues grow 19% sequentially and 98% year over year
• Subscribers reach 670,000, growing 11% sequentially and 118% year over year
• EBITDA Increases 67% sequentially to $6.5 million

LOS GATOS, Calif., July 24 /PRNewswire-FirstCall/-- Netflix, Inc. (Nasdaq: NFLX - News) announced financial results for the second quarter ended June 30, 2002. Total revenue for the second quarter was $36.4 million, compared to $18.4 million for the second quarter ended June 30, 2001, and $30.5 million for the first quarter ended March 31, 2002. EBITDA(1) for the second quarter 2002 was $6.5 million, compared to a loss of $0.1 million for the second quarter ended June 30, 2001, and $3.9 million for the first quarter ended March 31, 2002.

Netflix also reported a net loss on a GAAP basis totaling $13.4 million or $1.31 per basic and diluted share, compared to a net loss of $8.0 million or $4.48 per basic and diluted share for the quarter ended June 30, 2001 and a net loss of $4.5 million or $2.20 per basic and diluted share for the quarter ended March 31, 2002.

Excluding stock-based compensation expense and $10.7 million in one-time interest charges related to debt retirement, pro forma net income was $12.0 thousand, or $0.00 per pro forma basic and diluted share, for the second quarter of 2002, compared to a pro forma net loss of $6.6 million, or $0.48 per pro forma basic and diluted share, for the second quarter of 2001, and a pro forma net loss of $1.7 million, or $0.11 per pro forma basic and diluted share for the first quarter of 2002.

"Our second quarter 2002 and first quarter as a public company was marked by a number of significant accomplishments, including record subscribers and revenue, a dramatic increase in distribution capability, and a successful initial public offering," said Reed Hastings, Netflix CEO and co-founder. "Our subscribers grew to 670,000 and drove record total revenue for the quarter of $36.4 million, while churn(2) declined to 6.7 percent. We also completed the opening of our ten new regional distribution centers to provide faster service and further drive demand. I'm very pleased with the customer and market reception to Netflix as we pioneer a new category in the delivery of home entertainment," concluded Hastings.

In the second quarter Netflix raised $94.9 million in gross proceeds through the sale of 6,325,000 shares of the Company's common stock in its initial public offering.

Business Outlook

The following are the Company's current expectations for the third and fourth quarters of 2002:

  • The Company expects to end the third quarter of 2002 with approximately 700,000 to 730,000 subscribers and the fourth quarter of 2002 with approximately 830,000 to 860,000 subscribers.
  • The Company expects total revenue to be in the range of $37 and $40 million for the third quarter of 2002 and in the range of $41 and $44 million for the fourth quarter of 2002.
  • As a result of increased postage costs and disc usage, the Company expects gross margins for the third and fourth quarters to decline by two to three percentage points from the gross margin in the second quarter and be in a range of 47 and 48%.
  • The Company expects a pro forma operating loss before stock-based compensation expense of approximately $3.5 million and $5.5 million for the third quarter of 2002 and a pro forma operating loss before stock-based compensation expense in the range of $3.0 million and $6.0 million for the fourth quarter of 2002. The Company's goal is to be profitable on a pro forma operating basis, beginning in the second quarter of fiscal 2003.
  • EBITDA is expected to be in the range of $2.0 to $4.0 million for the third quarter of 2002 and $2.5 to $4.5 million for the fourth quarter of 2002.

The Netflix earnings call will be web cast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed at http://www.netflix.com or at http://www.prnewswire.com . Following the conclusion of the web cast, a replay of the call will be available via Netflix's web site at http://www.netflix.com . The company plans to include discussion of its business outlook in the conference call.

About Netflix

Launched in 1998, Netflix is the world's largest online DVD rental service, providing more than 670,000 subscribers with access to a comprehensive library of over 12,000 DVD titles. For $19.95 a month, Netflix subscribers can rent as many DVDs as they want, with three movies out at a time, and keep them for as long as they like. There are no due dates and no late fees. DVDs are delivered directly to the subscriber's address by first- class mail from 11 distribution centers throughout the United States. The company also provides background information on DVD releases, including reviews, member reviews and ratings and personalized movie recommendations. For more information on the company, 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 the number of our subscribers, our revenues, gross margins, pro forma operating loss, and EBITDA for the third and fourth quarters of 2002 as well as the Company's goals regarding pro forma operating income in 2003. These statements are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to manage our growth, in particular managing our subscriber acquisition costs 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; fluctuations in consumer 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; changes to the exclusive release period provided by the studios for DVDs following theatrical release; 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 final prospectus dated May 22, 2002 relating to our initial public offering. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

  • (1) EBITDA consists of operating loss before depreciation, amortization of intangible assets, amortization of DVD library, non-cash charges for equity instruments granted to non-employees, gains or losses on disposal of assets and stock-based compensation.
  • (2) The company calculates churn as a monthly percentage determined by subtracting from one, a quotient, the numerator of which is the ending subscribers for the current quarter and the denominator of which is the sum of the previous quarter's ending subscribers plus the current quarter's new trial subscribers and then dividing this resulting number by 3, which is the number of months in the quarter.

Netflix, Inc.
     Statements of Operations
     (in thousands, except per share data)
                                                 Three Months Ended
                                        Jun 30, 2001 Mar 31, 2002 Jun 30, 2002
    Revenues:
     Subscription                           $17,392     $30,069      $35,608
     Sales                                      967         458          752
      Total revenues                         18,359      30,527       36,360
    Cost of revenues:
     Subscription                            10,776      14,872       17,779
     Sales                                      446         286          313
      Total cost of revenues                 11,222      15,158       18,092
    Gross profit                              7,137      15,369       18,268
    Operating expenses:
     Fulfillment                              3,589       4,155        4,854
     Technology and development               4,896       3,181        3,518
     Marketing                                4,090       7,938        8,054
     General and administrative               1,031       1,309        1,638
     Restructuring charges                       --          --           --
     Stock-based compensation                 1,436       2,840        2,746
      Total operating expenses               15,042      19,423       20,810
    Operating loss                           (7,905)     (4,054)      (2,542)
    Interest and other income (expense),
     net                                        (96)       (454)     (10,887)
    Loss before income taxes                 (8,001)     (4,508)     (13,429)
    Provision for income taxes                   --          --           --
    Net loss                                $(8,001)    $(4,508)    $(13,429)
    Net loss per share:
     GAAP Basic and Diluted                  $(4.48)     $(2.20)      $(1.31)
     Pro forma Basic                          $(.59)      $(.30)       $(.76)
     Pro forma Diluted                        $(.59)      $(.30)       $(.76)
    Weighted average shares outstanding:
     GAAP Basic and Diluted                   1,787       2,047       10,216
     Pro forma Basic                         13,664      14,834       17,573
     Pro forma Diluted                       13,664      14,834       25,057
    Other data:
    EBITDA and Adjusted EBITDA
     Operating loss                         $(7,905)    $(4,054)     $(2,542)
     Add back:
      Stock based compensation                1,436       2,840        2,746
     Pro forma operating income (loss)       (6,469)     (1,214)         204
      Depreciation of PP&E                    1,363       1,457        1,448
      Amortization of DVD Library             4,508       2,917        3,988
      Amortization of Intangibles               456         706          819
      Non-cash charges for equity
       granted to non-employees                  10          --           --
      Loss on disposal of PP&E                   --          --           --
    EBITDA                                    $(132)     $3,866       $6,459
      Less: Amortization of DVD library      (4,508)     (2,917)      (3,988)
      Add: "Normalized" DVD library
       amortization                           1,223
    Adjusted EBITDA                         $(3,417)       $949       $2,471
    Pro forma net income (loss):
     Net loss                               $(8,001)    $(4,508)    $(13,429)
     Add back:
      Restructuring charges                      --          --           --
      Stock-based compensation                1,436       2,840        2,746
      Non-cash interest on early
       repayment of debt                         --          --       10,695
    Pro forma net income (loss)             $(6,565)    $(1,668)         $12
    Pro forma net income (loss) per
     share:
     Pro forma Basic                          $(.48)      $(.11)        $.00
     Pro forma Diluted                        $(.48)      $(.11)        $.00


     Netflix, Inc.
     Balance Sheets
     (in thousands, except per share data)
                                                             As of
                                                 Dec 31, 2001     Jun 30, 2002
    Assets
    Current assets:
      Cash and cash equivalents                     $16,131           $49,759
      Short term investments                             --            42,040
      Prepaid expenses                                1,019             2,168
      Prepaid revenue sharing expenses                  732               299
      Other current assets                            1,670               765
        Total current assets                         19,552            95,031
    DVD library, net                                  3,633             6,116
    Intangible assets, net                            7,917             7,710
    Property and equipment, net                       8,205             6,727
    Deposits                                          1,677             1,696
    Other assets                                        646               618
        Total assets                                $41,630          $117,898
    Liabilities and Stockholders'
     (Deficit) Equity
    Current liabilities:
      Accounts payable                              $13,715           $13,371
      Accrued expenses                                4,544             7,819
      Deferred revenue                                4,937             7,066
      Current portion of capital lease
       obligations                                    1,345             1,493
      Notes payable                                   1,667               417
        Total current liabilities                    26,208            30,166
    Deferred rent                                       240               269
    Capital lease obligations, less
     current portion                                  1,057               765
    Note payable                                         --                --
    Subordinated notes payable                        2,799                --
        Total liabilities                            30,304            31,200
    Commitments and contingency
    Redeemable convertible preferred stock          101,830                --
    Stockholders' (deficit) equity:
      Convertible preferred stock                         6                --
      Common stock                                        2                21
      Additional paid-in capital                     52,479           261,011
      Deferred stock-based compensation              (5,725)          (19,024)
      Accumulated other comprehensive
       income                                            --              (107)
      Accumulated deficit                          (137,266)         (155,203)
        Total stockholders' (deficit)
         equity                                     (90,504)           86,698
        Total liabilities and
         stockholders' (deficit) equity             $41,630          $117,898

    Working capital                                 $(6,656)          $64,865

    Per share amounts
      Issued and outstanding shares
       (000's)                                                         21,588
      Book value per share                                              $4.02
      Cash and short term investments per share                         $4.25


     Netflix, Inc.
     Statements of Cash Flows
     (in thousands, except per share data)
                                                  Three Months Ended
                                        Jun 30, 2001 Mar 31, 2002 Jun 30, 2002
    Cash flows from operating activities:
     Net loss                                $(8,001)    $(4,508)    $(13,429)
     Adjustments to reconcile net loss to
      net cash (used in)
      provided by operating activities:
       Depreciation of property plant and
        equipment                              1,363       1,457        1,448
       Amortization of DVD library             4,508       2,917        3,988
       Amortization of intangible assets         456         706          819
       Noncash charges for equity
        instruments granted to
        non-employees                             10          --           --
       Stock-based compensation expense        1,436       2,840        2,746
       Loss on disposal of property and
        equipment                                 --          --           --
       Gain on disposal of DVDs                   --        (283)        (674)
       Noncash interest expense                  (36)        395       10,921
       Changes in operating assets and
        liabilities:
        Prepaid expenses and other
         current assets                          (64)       (773)         962
        Accounts payable                         998       2,577       (2,921)
        Accrued expenses                         (10)       (186)       3,461
        Deferred revenue                         156       1,350          779
        Deferred rent                             37          13           16
         Net cash (used in) provided by
          operating activities                   853       6,505        8,116
    Cash flows from investing activities:
     Purchases of short-term investments          --          --      (42,147)
     Proceeds from sale of short-term
      investments                                 --          --           --
     Purchases of property and equipment        (685)        (95)        (749)
     Acquisitions of DVD library              (1,568)     (6,161)      (3,480)
     Proceeds from sale of DVDs                   --         458          752
     Deposits and other assets                  (395)         --            9
         Net cash (used in) provided by
          investing activities                (2,648)     (5,798)     (45,615)
    Cash flows from financing activities:
     Proceeds from issuance of redeemable
      convertible preferred stock                 --          --           --
     Proceeds from issuance of common
      stock                                       58          87       86,428
     Net proceeds from issuance of
      subordinated notes payable
      and detachable warrants                     --          --           --
     Repurchases of common stock                  (7)         --           (3)
     Proceeds from issuance of notes
      payable                                     --          --           --
     Principal payments on notes payable
      and capital lease obligations             (971)     (1,254)     (14,838)
         Net cash (used in) provided by
          financing activities                  (920)     (1,167)      71,587
    Net increase (decrease) in cash and
     cash equivalents                         (2,715)       (460)      34,088
    Cash and cash equivalents, beginning
     of period                                 7,076      16,131       15,671
    Cash and cash equivalents, end of
     period                                   $4,361     $15,671      $49,759

    Free Cash Flow:
     Net cash (used in) provided by
      operating activities                      $853      $6,505       $8,116
     Purchases of property and equipment        (685)        (95)        (749)
     Acquisitions of DVD library              (1,568)     (6,161)      (3,480)
     Proceeds from sale of DVDs                   --         458          752
     Deposits and other assets                  (395)         --            9
     Free Cash Flow                          $(1,795)       $707       $4,648

    Supplemental disclosure:
     Cash paid for interest                     $201        $136         $240
     Noncash investing and financing
      activities:
      Purchase of assets under capital
       lease obligations                         $--        $583          $--
      Discount on capital lease
       obligation                                $--         $--          $--
      Warrant issued as a deposit on
       operating lease                           $--         $--          $--
      Exchange of Series F non-voting
       convertible preferred stock for
       intangible asset                         $873      $1,213         $105
      Unrealized appreciation
       (depreciation) of short term
       investments                               $--         $--        $(107)


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