NetFlix 2005 Annual Report Download - page 79

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
The Company measured the original issuances and any subsequent adjustments using the fair value of the
securities at the issuance and any subsequent adjustment dates. The fair value was recorded as intangible assets
with a corresponding credit to additional paid-in capital. The intangible assets are being amortized to cost of
subscription revenues ratably over the remaining term of the agreements which initial terms were three to five
years. The Studio intangible assets were fully amortized in 2005.
Strategic Marketing Alliance Intangible Assets
During 2001, in connection with a strategic marketing alliance agreement, the Company issued 416,440 shares
of Series F Preferred Stock. These shares automatically converted into 277,626 shares of common stock upon the
closing of the Company’s initial public offering. Under the agreement, the strategic partner has committed to
provide, on a best-efforts basis, a stipulated number of impressions to a co-branded Web site and the Company’s
Web site over a period of 24 months. In addition, the Company is allowed to use the partner’s trademark and logo in
marketing the Company’s subscription services. The Company recognized the fair value of these instruments as
intangible assets with a corresponding credit to additional paid-in capital. The intangible assets have been fully
amortized on a straight-line basis to marketing expense over the two-year term of the agreement.
Patents
In 2005, the Company capitalized $481 related to certain technology patents acquired. The capitalized
patents are being amortized to ‘Technology and Development’ in the Consolidated Statements of Income over
the remaining useful life of the patents, the last of which expires in September 2015. The annual amortization
expense of the patents that existed as of December 31, 2005 is expected to be approximately $47 for each of the
five succeeding years.
4. Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consisted of the following:
As of December 31, 2005
2004 2005
Computer equipment ............................ 3years $ 15,866 $ 22,549
Other equipment ................................ 3-5years 8,072 19,641
Computer software, including internal-use software .... 1-3years 10,094 13,061
Furniture and fixtures ............................ 3years 1,193 1,240
Leasehold improvements ................. Over life of lease 2,482 2,866
Capital work-in-progress .................................. 4,498 13,266
Property and equipment, gross .............................. 42,205 72,623
Less: accumulated depreciation ............................. (23,477) (32,410)
Property and equipment, net ................................ $18,728 $ 40,213
Capital work-in-progress consists primarily of approximately $9,974 of leasehold improvements associated
with the Company’s newly constructed corporate headquarters in Los Gatos, California. The Company occupied
the facility upon its completion in January 2006, at which time it commenced amortization of the related
leasehold improvements. The leasehold improvements are being amortized over the shorter of the lease term or
the estimated useful life of the related assets.
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