NetFlix 2003 Annual Report Download - page 35

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The increase in cost of subscription revenues from 2001 to 2002 was partially offset by a $4.2 million
decrease, or 21 percent, in DVD amortization. The decrease was primarily attributable to a $4.7 million increase
in amortization in 2001, which was caused by the change in the estimated life of our DVD library from three
years to one year effective January 1, 2001, partially offset by an increase in amortization related to increased
acquisitions for our DVD library.
Gross Margin
Year Ended December 31,
2001
Percent
Change 2002
Percent
Change 2003
(in thousands, except percentages)
Grossprofit ........................... $26,005 187.1% $74,670 65.9% $123,883
Grossmargin .......................... 34.3% 48.9% 45.5%
The decrease in gross margin from 2002 to 2003 was primarily due to a higher percentage of DVD
amortization as a result of increased acquisitions for our library, coupled with a higher percentage of postage and
packaging expenses as a result of an increase in disc usage per average paying subscriber. The decrease in gross
margin was partially offset by a lower percentage of revenue sharing expenses as a result of our rental mix
shifting proportionately in favor of purchased titles and away from titles subject to revenue sharing agreements.
Gross margin increased from 2001 to 2002 primarily as a result of the growth in our subscription revenues
and a decrease in our direct incremental costs of providing those subscription services, coupled with the 21
percent reduction in DVD amortization.
Operating Expenses:
Fulfillment
Year Ended December 31,
2001
Percent
Change 2002
Percent
Change 2003
(in thousands, except percentages)
Fulfillment ............................. $13,452 44.0% $19,366 61.5% $31,274
As a percentage of revenues ............... 17.7% 12.7% 11.5%
The increase in fulfillment expenses in absolute dollars from 2002 to 2003 was primarily attributable to an
increase in personnel-related costs resulting from the higher volume of activities in our customer service and
shipping centers. In addition, our credit card fees increased $3.0 million from 2002 to 2003 as a result of the
increase in subscriptions. The increase in fulfillment expenses in absolute dollars from 2001 to 2002 was also
attributable to an increase in personnel-related costs, coupled with a $1.7 million increase in credit card fees. As
a percentage of revenues, fulfillment expenses decreased from 2002 to 2003, and from 2001 to 2002, primarily
due to a combination of an increasing revenue base and improvements in our fulfillment productivity due to our
continuous efforts to refine and streamline our fulfillment operations.
As of December 31, 2003, we were operating a nationwide network of shipping centers. We anticipate
opening additional shipping centers to continue to reduce delivery times and increase library utilization. We
expect our fulfillment expenses will increase in absolute dollars in 2004 as a result of higher credit card fees and
the continued increase in the volume of activities in our customer service and shipping centers.
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