October 17, 2002

Netflix Announces Record Third Quarter 2002 Financial Results

  • Revenue of $40.7 million, up 116 percent year over year and up 12 percent sequentially.
  • EBITDA of $6.3 million, up 923 percent year over year.
  • Free cash flow of $5.8 million or 14 percent of revenue and 92 percent of
LOS GATOS, Calif., Oct 17, 2002 /PRNewswire-FirstCall via COMTEX/ -- Netflix, Inc. (NFLX) announced financial results for the third quarter ended September 30, 2002. Total revenue for the third quarter was $40.7 million, compared to $18.9 million for the third quarter ended September 30, 2001, and $36.4 million for the second quarter ended June 30, 2002.

EBITDA for the third quarter 2002 was $6.3 million, compared to $614 thousand for the third quarter ended September 30, 2001, and $6.5 million for the second quarter ended June 30, 2002.

Free cash flow for the third quarter 2002 was 14 percent of revenue or $5.8 million, up 24 percent compared to the second quarter ended June 30, 2002. Year to date the Company has generated $11.1 million of free cash flow. In the most recent quarter, free cash flow was 92 percent of EBITDA.

Net loss on a GAAP basis for the third quarter 2002 was $1.7 million or a loss of $0.08 per basic and diluted share, compared to a net loss of $5.6 million or a loss of $0.38 per pro forma basic and diluted share for the quarter ended September 30, 2001 and a net loss of $13.4 million or a loss of $0.76 per pro forma basic and diluted share for the second quarter ended June 30, 2002.

Excluding stock-based compensation expense, pro forma net loss was $228 thousand, or $0.01 per pro forma basic and diluted share, for the third quarter of 2002 compared to a pro forma net loss of $3.7 million, or a loss of $0.25 per pro forma basic and diluted share, for the third quarter of 2001 and a pro forma net income of $12.0 thousand, or $0.00 per pro forma basic and diluted share, for the second quarter of 2002, which also excluded $10.7 million in one-time interest charges related to debt retirement.

Subscriber acquisition costs(1) for the quarter declined 2 percent sequentially to $33.57 per new-trial subscriber compared to a cost of $34.13 for the second quarter ended June 30, 2002, and a cost of $32.19 for the third quarter ended September 30, 2001.

As previously announced, Netflix ended the third quarter of 2002 with 742,000 total subscribers of which 708,000 were paying subscribers. During the third quarter, the Company acquired 277,000 new trial subscribers

Business Outlook

The Company is updating guidance for pro forma operating income and EBITDA for the fourth quarter of fiscal 2002. The updated guidance is:

  • Pro forma operating loss before stock-based compensation expense of $2.0 to $4.0 million. The previous guidance was a loss of $3.0 to $6.0 million.
  • EBITDA of $5.0 to $6.5 million. The previous guidance was EBITDA of $2.5 to $4.5 million. The following guidance remains unchanged:
  • Ending subscribers of 830 to 860 thousand
  • Revenue of $41 to $44 million
  • Gross margin of 47 to 48%


The Netflix earnings call will be web cast today at 4:10 p.m. Eastern Time / 1:10 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 742,000 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 our subscriber growth, revenues, gross margins, pro forma operating income, and EBITDA for the fourth quarter of 2002. 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 filings with the Securities and Exchange Commission, including 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) Subscriber acquisition costs is defined as the total marketing expense on the Company's Statement of Operations divided by total new trial subscribers in the quarter.

Netflix, Inc.
    Statements of Operations
    (Unaudited)
    (in thousands, except per share data)
                                                Three Months Ended
                                            Sep 30,   Jun 30,    Sep 30,
                                             2001      2002       2002
    Revenues:
     Subscription                          $18,444    $35,608   $40,163
     Sales                                     434        752       568
      Total revenues                        18,878     36,360    40,731
    Cost of revenues:
     Subscription                            9,667     17,779    21,147
     Sales                                     176        313       349
      Total cost of revenues                 9,843     18,092    21,496
    Gross profit                             9,035     18,268    19,235
    Operating expenses:
     Fulfillment                             3,283      4,854     4,908
     Technology and development              4,463      3,518     3,966
     Marketing                               3,444      8,054     9,299
     General and administrative              1,003      1,638     1,870
     Restructuring charges                     671         --        --
     Stock-based compensation                1,220      2,746     1,467
      Total operating expenses              14,084     20,810    21,510
    Operating loss                          (5,049)    (2,542)   (2,275)
    Interest and other income (expense),
     net                                      (505)   (10,887)      580
    Loss before income taxes                (5,554)   (13,429)   (1,695)
    Provision for income taxes                  --         --        --
    Net loss                               $(5,554)  $(13,429)  $(1,695)
    Net loss per share:
     Basic and diluted                      $(2.94)    $(1.31)    $(.08)
     Pro forma basic and diluted             $(.38)     $(.76)    $(.08)
    Weighted average shares outstanding:
     Basic and diluted                       1,891     10,216    21,922
     Pro forma basic and diluted            14,540     17,573    21,922
    Other data:
    EBITDA
     Operating loss                        $(5,049)   $(2,542)  $(2,275)
     Add back:
      Stock based compensation               1,220      2,746     1,467
     Pro forma operating income (loss)      (3,829)       204      (808)
      Depreciation of PP&E                   1,319      1,448     1,576
      Amortization of DVD Library            2,449      3,988     4,663
      Amortization of Intangibles              667        819       808
      Non-cash charges for equity granted
       to non-employees                          8         --        40
    EBITDA                                    $614     $6,459    $6,279
    Pro forma net income (loss):
     Net loss                              $(5,554)  $(13,429)  $(1,695)
     Add back:
      Restructuring charges                    671         --        --
      Stock-based compensation               1,220      2,746     1,467
      Non-cash interest on early
       repayment of debt                        --     10,695        --
    Pro forma net income (loss)            $(3,663)       $12     $(228)
    Pro forma net income (loss) per
     share:
     Pro forma basic and diluted             $(.25)      $.00     $(.01)
    Netflix, Inc.
    
	
	
	
	Balance Sheets
    (Unaudited)
    (in thousands, except share and per share data)
                                                            As of
                                               Dec 31, 2001      Sep 30, 2002
    Assets
    Current assets:
     Cash and cash equivalents                     $16,131           $54,321
     Short-term investments                             --            43,217
     Prepaid expenses                                1,019             1,807
     Prepaid revenue sharing expenses                  732               379
     Other current assets                            1,670             1,551
       Total current assets                         19,552           101,275
    DVD library, net                                 3,633             7,070
    Intangible assets, net                           7,917             6,902
    Property and equipment, net                      8,205             5,870
    Deposits                                         1,677             1,185
    Other assets                                       646               605
       Total assets                                $41,630          $122,907
    Liabilities and Stockholders'
     (Deficit) Equity
    Current liabilities:
     Accounts payable                              $13,715           $18,148
     Accrued expenses                                4,544             8,108
     Deferred revenue                                4,937             7,179
     Current portion of capital lease
      obligations                                    1,345             1,482
     Notes payable                                   1,667                --
       Total current liabilities                    26,208            34,917
    Deferred rent                                      240               285
    Capital lease obligations, less
     current portion                                 1,057               394
    Subordinated notes payable                       2,799                --
       Total liabilities                            30,304            35,596
    Commitments and contingency
    Redeemable convertible preferred
     stock                                         101,830                --
    Stockholders' (deficit) equity:
     Convertible preferred stock, $0.001
      par value; 8,500,000 shares
      authorized;                                        6                --
      6,157,499 and no shares issued and
       outstanding at December 31, 2001
       and September 30, 2002,
       respectively; aggregate
       liquidation preference of $2,222
     Common stock, $0.001 par value;
      100,000,000 and 150,000,000 shares                 2                22
      authorized at December 31, 2001 and
       September 30, 2002, respectively;
       2,161,855 and 22,069,068 issued
       and outstanding at December 31,
       2001 and September 30, 2002,
       respectively
     Additional paid-in capital                     52,479           257,339
     Deferred stock-based compensation              (5,725)          (13,755)
     Accumulated other comprehensive
      income                                            --               603
     Accumulated deficit                          (137,266)         (156,898)
       Total stockholders' (deficit)
        equity                                     (90,504)           87,311
       Total liabilities and
        stockholders' (deficit) equity             $41,630          $122,907
    
	
	
	
	Netflix, Inc.
    Statements of Cash Flows
    (Unaudited)
    (in thousands, except per share data)
                                                    Three Months Ended
                                              Sep 30,      Jun 30,     Sep 30,
                                               2001         2002        2002
    Cash flows from operating activities:
     Net loss                                $(5,554)    $(13,429)    $(1,695)
     Adjustments to reconcile net loss to
      net cash (used in)
      provided by operating activities:
       Depreciation of property plant and
        equipment                              1,319        1,448       1,576
       Amortization of DVD library             2,449        3,988       4,663
       Amortization of intangible assets         667          819         808
       Noncash charges for equity
        instruments granted to
        non-employees                              8           --          40
       Stock-based compensation expense        1,220        2,746       1,467
       Loss on disposal of property and
        equipment                                 --           --          --
       Gain on disposal of DVDs                   --         (674)       (512)
       Noncash interest expense                  466       10,921          37
       Changes in operating assets and
        liabilities:
        Prepaid expenses and other
         current assets                          466          962        (505)
        Accounts payable                        (308)      (2,921)      4,777
        Accrued expenses                        (582)       3,461         289
        Deferred revenue                         289          779         113
        Deferred rent                             38           16          16
         Net cash provided by operating
          activities                             478        8,116      11,074
    Cash flows from investing activities:
     Purchases of short-term investments          --      (42,147)       (467)
     Proceeds from sale of short-term
      investments                                 --           --          --
     Purchases of property and equipment      (1,029)        (749)       (719)
     Acquisitions of DVD library              (1,277)      (3,480)     (5,673)
     Proceeds from sale of DVDs                   --          752         568
     Deposits and other assets                  (157)           9         524
         Net cash used in investing
          activities                          (2,463)     (45,615)     (5,767)
    Cash flows from financing activities:
     Proceeds from issuance of redeemable
      convertible preferred stock                 --           --          --
     Proceeds from issuance of common
      stock                                       10       86,428          91
     Net proceeds from issuance of
      subordinated notes payable
      and detachable warrants                 12,831           --          --
     Repurchases of common stock                  --           (3)         --
     Proceeds from issuance of notes
      payable                                     --           --          --
     Principal payments on notes payable
      and capital lease obligations             (983)     (14,838)       (836)
         Net cash (used in) provided by
          financing activities                11,858       71,587        (745)
    Net increase (decrease) in cash and
     cash equivalents                          9,873       34,088       4,562
    Cash and cash equivalents, beginning
     of period                                 4,361       15,671      49,759
    Cash and cash equivalents, end of
     period                                  $14,234      $49,759     $54,321
    Free Cash Flow:
     Net cash provided by operating
      activities                                $478       $8,116     $11,074
     Purchases of property and equipment      (1,029)        (749)       (719)
     Acquisitions of DVD library              (1,277)      (3,480)     (5,673)
     Proceeds from sale of DVDs                   --          752         568
     Deposits and other assets                  (157)           9         524
     Free Cash Flow                          $(1,985)      $4,648      $5,774
    Supplemental disclosure:
     Cash paid for interest                     $187         $240         $95
     Noncash investing and financing
      activities:
      Discount on capital lease
       obligation                               $172          $--         $--
      Exchange of Series F non-voting
       convertible preferred stock for
       intangible asset                       $2,690         $105         $--
      Unrealized gain (loss) on short-
       term investments                          $--        $(107)       $710
      Conversion of redeemable
       convertible preferred stock to
       common stock                              $--     $101,830         $--
    
	
	
	
	
	Netflix, Inc.
    Other data:
    (Unaudited)
                                                Three Months Ended
                                             Sep 30,    Jun 30,   Sep 30,
                                              2001      2002       2002
    Subscribers:
     New Trial Subscribers: during period
      (000's)                                  107        236       277
      New Trial Subscribers year to year
       change                               (19.5%)    168.2%    158.9%
    Subscribers: end of period (000's)         334        670       742
     Year to year change                       40%       118%      122%
     Qtr. to Qtr. sequential change             8%        11%       11%
    Free subscribers: end of period
     (000's)                                    19         37        34
     Free % of ending subscribers             5.7%       5.5%      4.6%
    Paid subscribers: end of period
     (000's)                                   315        633       708
     Year to year change                       49%       114%      125%
     Qtr. to Qtr. sequential change             6%        13%       12%
     Monthly churn                            6.5%       6.7%      7.2%
    Subscription revenue per average paid
     subscriber (monthly)                   $20.12     $19.86    $19.97
    Subscriber Acquisition Cost              $32.19     $34.13    $33.57
    Margins:
     Gross margin                            47.9%      50.2%     47.2%
     Operating margin                       (26.7%)     (7.0%)    (5.6%)
     Proforma operating margin              (20.3%)      0.6%     (2.0%)
     Net margin                             (29.4%)    (36.9%)    (4.2%)
     Pro forma net margin                   (19.4%)      0.0%     (0.6%)
    Expense % of revenues:
     Fulfillment                             17.4%      13.3%     12.0%
     Technology and development              23.6%       9.7%      9.7%
     Marketing                               18.2%      22.2%     22.8%
     General and administrative               5.3%       4.5%      4.6%
      Operating expenses before stock-
       based comp. and restructuring         64.6%      49.7%     49.2%
     Restructuring charges                    3.6%       0.0%      0.0%
     Stock-based compensation                 6.5%       7.6%      3.6%
      Total operating expenses               74.7%      57.3%     52.8%
    Year to year change:
     Subscription revenues                   81.1%     104.7%    117.8%
     Sales revenues                         100.0%     (22.2%)    30.9%
      Total revenues                         85.4%      98.1%    115.8%
     Fulfillment                             38.6%      35.2%     49.5%
     Technology and development              10.4%     (28.1%)   (11.1%)
     Marketing                              (47.9%)     96.9%    170.0%
     General and administrative             (46.2%)     58.9%     86.4%
      Operating expenses before stock-
       based comp. and restructuring        (18.1%)     32.8%     64.4%
     Restructuring charges                  100.0%       0.0%   (100.0%)
     Stock-based compensation               (41.1%)     91.2%     20.2%
      Total operating expenses              (17.0%)     38.3%     52.7%



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