NetFlix 2005 Annual Report Download - page 45

Results of Operations
The following table sets forth, for the periods presented, the line items in our Statements of Income as a
percentage of total revenues. The information contained in the table below should be read in conjunction with the
financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K.
Year Ended December 31,
2003 2004 2005
Revenues ........................................................... 100.0% 100.0% 100.0%
Cost of revenues:
Subscription ..................................................... 54.6 54.6 57.7
Fulfillment expenses .............................................. 11.6 11.3 10.4
Total cost of revenues ......................................... 66.2 65.9 68.1
Gross profit .......................................................... 33.8 34.1 31.9
Operating expenses:
Technology and development ....................................... 6.6 4.6 4.5
Marketing ....................................................... 18.5 19.6 20.8
General and administrative ......................................... 3.5 3.3 4.3
Stock-based compensation .......................................... 3.9 3.2 2.2
Gain on disposal of DVDs .......................................... (0.4) (0.5) (0.3)
Total operating expenses ....................................... 32.1 30.2 31.5
Operating income ..................................................... 1.7 3.9 0.4
Other income (expense):
Interest and other income ........................................... 0.9 0.4 0.9
Interest and other expense .......................................... (0.2) — (0.1)
Income before income taxes ............................................. 2.4 4.3 1.2
Provision for (benefit from) income taxes .................................. — — (5.0)
Net income .......................................................... 2.4% 4.3% 6.2%
Revenues Year Ended December 31,
2003
Percent
Change 2004
Percent
Change 2005
(in thousands, except percentages and average monthly
subscription revenue per paying subscriber)
Revenues ...................................... $270,410 85.1% $500,611 36.3% $682,213
Other data:
Average number of paying subscribers ........... 1,115 78.3% 1,988 59.4% 3,169
Average monthly revenue per paying subscriber . . . $ 20.21 3.8% $ 20.98 (14.5%) $ 17.94
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 during each subscriber’s monthly
subscription period. In addition, in 2005, we generated a small portion of our revenues from the sale of
advertising.
The increase in our revenues in 2005 as compared to 2004 was primarily attributable to substantial growth
in the average number of paying subscribers as summarized in the table above, offset in part by a decline in
average monthly subscription revenue per paying subscriber. We believe the increase in the number of paying
subscribers was driven primarily by increased consumer awareness of the benefits of online DVD rentals and
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