Search for a Company by Name
Home > NetFlix Annual Reports > 2006 Annual Report

NetFlix 2006 Annual Report Download

Download and view the complete 2006 NetFlix annual report

Please find the complete 2006 NetFlix annual report annual report below. You can navigate through the pages in the report by either clicking one the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Table of contents

  • Page 1
    2006 Annual Report
  • Page 2
  • Page 3
    ... Netflix. We added a record number of new subscribers, invested in the development of our Internet delivery feature, and significantly exceeded ... positioned to reach our long-term objective of leading the online subscription movie rental business. 20 0 6 RESULTS In 2006, aggressive investment in ...
  • Page 4
    ... for us during this transition period. During the early years of Internet delivery when content is limited, the combination of our DVD by mail and Internet delivery service will offer a breadth of title selection unmatched by stand-alone Internet-only ...
  • Page 5
    ... make the best online movie rental service even better by enhancing our Web site, ... invest at least $40 million in continued improvement of Internet delivery, with a focus on content availability and ... $1 billion in revenues in the seven years since we invented online subscription DVD rental in 1999. ...
  • Page 6
    PERFORMANCE NETFLIX 2006 ANNUAL REPORT Subscribers (in thousands) 6,316 4,179 2,610 1,487 '03 '04 '05 '06 Revenue (in millions) $997 $682 $501 $270 '03 '04 '05 '06 Net Income (in millions) $49 $42 $22 $7 '03 '04 '05* '06 *2005 Net Income includes the benefit of realized ...
  • Page 7
    ... period from to Commission File Number: 000-49802 (Exact name of Registrant as specified in its charter) Netflix, Inc. 100 Winchester Circle ... the registrant, based upon the closing sales price for the registrant's common stock, as reported in the NASDAQ Global Select Market System, was $1,242,174,...
  • Page 8
    NETFLIX, INC. TABLE OF CONTENTS Page PART I Item 1. Item 1A. Item 1B. Item...and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 ... Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and ...
  • Page 9
    ... and impacts relating to our pricing strategy, delivery time, volume of movie rentals and growth of the online DVD rental market, our DVD ...statement, except as may otherwise be required by law. Item 1. Business We are the largest online movie rental subscription service providing more than 6,300,000...
  • Page 10
    .... First, despite the large number of available titles on DVD, consumers lack a deep selection of titles from existing subscription channels and traditional video rental outlets. Subscription channels, pay-per-view and video-on-demand services continue to offer a ...
  • Page 11
    ... outlets, video retailers, subscription channels, pay-per-view and VOD services. To maximize our selection of DVD titles, we continuously add newly released DVD titles to .... After receipt of returned DVDs, we mail subscribers the next available DVD in their queue of selected titles. We ...
  • Page 12
    ...allows subscribers to quickly select current titles, reserve upcoming releases and build an individual queue for future viewing using our ... implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and customer...
  • Page 13
    ... random control testing extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware and software co-located at a service provider offering ... essential infrastructure. We manage our Web site 24 hours a day, seven days a week. We ...
  • Page 14
    ... with our subscribers in order to continually improve our Web site and our service. Our customer service center is open seven days a week.... to HBO, rent a DVD from Blockbuster, buy or download a DVD from Wal-Mart or Amazon and subscribe to Netflix, or some combination thereof, all in the same month. ...
  • Page 15
    ... available to digital cable subscribers in major metropolitan areas, such as New York, Boston, Los Angeles and San Francisco. Downloading of movies over the Internet to a personal computer is currently available from providers, such as iTunes, Vongo, ...
  • Page 16
    ..., California 95032, and our telephone number is (408) 540-3700. We maintain a Web site at www.netflix.com. The contents of our Web site... Annual Report on Form 10-K. In this Annual Report on Form 10-K, "Netflix," the "Company," "we" and the "registrant" refer to Netflix, Inc....
  • Page 17
    ... and national brand recognition. We could also face competition from potential new entrants into the online DVD rental or movie download markets. For example, we have seen the entry of direct competition from Blockbuster, which launched its online ...
  • Page 18
    ..., or could include: • video rental outlets, such as Blockbuster and Movie Gallery; • online DVD subscription rental sites, such as Blockbuster Online; • pay-per-view and VOD services; • movie retail stores, such ...
  • Page 19
    ... format for viewing in-home filmed entertainment. At present, DVD sales account for approximately 43%... of the exclusive window for movie rental and retail sales varies. Our business could ... Company announced an arrangement with Blockbuster by which Weinstein would distribute content on DVDs for rental...
  • Page 20
    ... and BluRay, and those released for online delivery may be more expensive to acquire than in DVD format. The rate of customer acceptance and adoption... attract and retain a large number of owners of DVD players who have traditionally relied on store-based rental outlets and persuade...
  • Page 21
    ..., become cost prohibitive or are adverse to our business. If companies that currently promote our service decide ... exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers and to return DVDs to us from our subscribers. We are subject to risks associated with using the public ...
  • Page 22
    ...replicating our DVDs use materials and methods more likely to break during delivery ...increase in postage will take place. The U.S. Postal Service continues to focus on plans to reduce its costs and ...If the U.S. Postal Service were to change any policies relative to the requirements of first-class mail...
  • Page 23
    ... associated with accurately predicting title demand could increase if we are required to directly purchase more titles. If the sales price of DVDs to retail consumers decreases, our ability to attract new subscribers may be adversely affected. The cost ...
  • Page 24
    ... and our Sunnyvale-based shipping center are located in the San Francisco Bay Area. In the event of ... and our Sunnyvale-based shipping center are located in the San Francisco Bay Area. Our business ... our fulfillment and delivery operations due to disruptions in service in the San Francisco Bay Area or...
  • Page 25
    ... approves payment of the orders. From time to time, fraudulent credit cards are used on our Web site to obtain service and access our DVD inventory. Typically, these ... credit cards and debit cards and, to a lesser extent, electronic checks. These rules, regulations and 17
  • Page 26
    ... related to, among other things, our Web site, our recommendation service, title selection processes and marketing activities. Trademark, copyright, patent ... rights extend to our technology, business processes and the content on our Web site. We use the intellectual property of third ...
  • Page 27
    ... designees. The regulation of domain names in the United States may change in the near future. Governing .... We are required to amortize capitalized film production costs over the expected revenue streams .... If government regulation of the Internet or other areas of our business changes or if consumer ...
  • Page 28
    ... if consumer attitudes toward use of the Internet change, consumers may become unwilling to select their entertainment online or otherwise provide us... have increased and may continue to increase our costs. Changes in the laws and regulations affecting public companies, including the provisions of the...
  • Page 29
    ... unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction... quarter of 2003, we began granting stock options to our employees on a monthly basis. The vesting periods provide for options to vest immediately, in comparison with the ...
  • Page 30
    ...the inherent limitations in predicting the future, forecasts of our revenues, gross margin, operating expenses, number of paying subscribers, number of DVDs shipped per day and ...center, processing and shipping center for San Francisco Bay Area Customer service center Encoding We operate...
  • Page 31
    ...Issuer Purchases of Equity Securities Our common stock has traded on the NASDAQ Global Select Market and its predecessor, the...public offering on May 23, 2002. The following table sets forth the intraday high and low sales prices per share of our common stock for the periods indicated, as reported by...
  • Page 32
    ... providers, Internet software and services companies and e-commerce companies. In previous years, the Company compared its total cumulative stockholder return with the Philadelphia TheStreet.com Internet Sector Index. The Company has elected ...
  • Page 33
    ... Data The following selected financial data is not necessarily indicative of results of future operations ..." and "Item 8. Financial Statements and Supplementary Data." Year Ended December 31,...) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross...
  • Page 34
    ... expenses divided by total gross subscriber additions during the period. Item 7. Overview Our Business We are the largest online movie rental subscription service providing more than 6,300,000 subscribers access to a comprehensive library of ...
  • Page 35
    ...be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, ...agreements. We acquire DVDs for the purpose of renting them to our subscribers and earning subscription rental revenues and as such, we consider our DVD library to be...
  • Page 36
    ...these assets. In accordance with Accounting Principles Board Opinion No. 20, Accounting Changes ("APB ...has been accounted for as a change in accounting estimate on a prospective basis from July 1, 2004. New releases ... employee stock purchase plan shares. The Black-Scholes option-pricing model requires...
  • Page 37
    ... incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is expected to be more reflective of market ... the first quarter of 2006. We grant stock options to our employees on a monthly basis. Such stock options ...
  • Page 38
    ... at the same time. Cost of Revenues: Subscription: We acquire titles for our library through traditional direct purchase and through revenue ..., we revised the estimate of useful life for the back-catalog DVD library from one to three years. New releases will continue to be amortized over a one-year ...
  • Page 39
    ...maintaining and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers... of 2003, we began granting stock options to our employees on a monthly basis. The vesting periods provide for options to vest immediately, in comparison with the...
  • Page 40
    ... change over prior period ...Other data: Average number of paying subscribers ...Percentage change over prior period ...Average monthly revenue per paying ... a decline in average monthly subscription revenue per paying subscriber. We believe the increase in the number of paying 32
  • Page 41
    ... of our lower cost subscription plans. We expect the average revenue per paying subscriber to ... growth in the average number of paying subscribers 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...
  • Page 42
    ... increase in the number of average paying subscribers offset by a slight decline in monthly movie rentals ... increase in the number of average paying subscribers offset by a slight decline in monthly movie rentals ... related to the change in estimate of useful life of our back-catalog DVD library made ...
  • Page 43
    ... life of our back-catalog DVD library and the rapid growth of lower priced plans which produce a higher margin than our most popular subscription plan of ... in additional expenses related to our instant viewing feature. As a result, we anticipate that cost of subscription will increase ...
  • Page 44
    ... part by a decrease in cost of providing free trials associated with our lower priced plans coupled with a slight decline in personnel-related costs. The increase in marketing expenses in ... partially by a decrease in the cost of providing free trials associated with our new lower priced plans, ...
  • Page 45
    ... of legal defense costs of $0.9 million) related to the proposed settlement costs of the Chavez vs. Netflix, Inc. lawsuit. As a percentage of revenues, the...to 2004 was primarily attributable to an increase in the cost of DVD sales. Interest and Other Income Year Ended December 31, 2004 2005 2006 (in ...
  • Page 46
    ...In the third quarter of 2006, we began classifying changes in Accounts payable related to the acquisition of our DVD library and Property and ... cash outflows related to investing activities. Changes in Accounts payable related to acquisitions of DVD library and Property and equipment were...
  • Page 47
    ... in proceeds from issuance of common stock under our employee stock plans. Contractual Obligations... relate primarily to acquisitions for our DVD library and online titles. Our purchase..., minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment...
  • Page 48
    ... recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance ...SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect the ...
  • Page 49
    ...'s rules and forms, and that such information is accumulated and communicated to our management,... and Chief Financial Officer, does not expect that our disclosure controls and... accounting principles. This material weakness resulted in a material error in the Company's consolidated financial statements...
  • Page 50
    ... has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. (c) Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the ...
  • Page 51
    ...Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual Meeting of ... with respect to principal independent registered public accounting firm fees and services is incorporated by reference from the...
  • Page 52
    ... by the registrant with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated 1997 Stock Plan ...Inc. Lease between Sobrato Interest II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive Severance and Retention ...
  • Page 53
    ...No. Exhibit Filing Date Filed Herewith 23.1 24 31.1 Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature page)...irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan †45
  • Page 54
    NETFLIX, INC. INDEX TO FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December ... Years Ended December 31, 2004, 2005 and 2006 ...Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and ...
  • Page 55
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc.: We have audited ... have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc.'s internal control over ...
  • Page 56
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc.: We have audited management's assessment, ... the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Netflix, Inc. ...
  • Page 57
    NETFLIX, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)... ...Other current assets ...Total current assets ...DVD library, net ...Intangible assets, net ...... and Stockholders' Equity Current liabilities: Accounts payable ...Accrued expenses ...Deferred revenue ...Total ...
  • Page 58
    NETFLIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2004 2005 2006 Revenues ...$500,611 Cost of revenues: Subscription ...273,401 Fulfillment expenses* ...58,311 Total cost of revenues ...Gross profit ......
  • Page 59
    ... income ... Exercise of options ...Issuance of common stock under employee stock purchase plan ...Issuance of...income ... Exercise of options ...Issuance of common stock under employee stock purchase plan ...Issuance ... of options ...1,379,012 Issuance of common stock under employee stock purchase plan ...
  • Page 60
    NETFLIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, ... ...Amortization of DVD library ...Amortization of intangible assets ...Stock-based compensation expense ...Excess ...Net cash provided by financing activities ...Effect of exchange rate changes on cash and cash ...
  • Page 61
    ...the "Company") was incorporated on August 29, 1997 and began operations on April 14, 1998. The Company is an online movie rental subscription service, providing more than 6,300,000 subscribers with access to a comprehensive library of more than...
  • Page 62
    ...: Condensed Consolidated Statements of Cash Flows Year Ended December 31, 2004 2005 Changes in Accounts Payable: As ... In the third quarter of 2004, the Company prepared to launch its online movie subscription service in the United Kingdom. However, in October 2004, the Company announced its ...
  • Page 63
    ... plaintiffs' attorneys' fees and expenses in the Chavez vs. Netflix, Inc. lawsuit. Amortization of DVD Library The Company amortizes its DVD library... be 1 year and 3 years, respectively. In estimating the useful life of its DVD library, the Company takes into account library utilization as well as an...
  • Page 64
    ...payroll and related costs incurred in testing, maintaining and modifying the Company's Web Site, its recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and...
  • Page 65
    ... as a reduction of cost of revenues when recognized in the Company's statements of operations. Income Taxes The Company accounts ... pursuant to our employee stock purchase plan using the treasury stock method. The shares ... stock options ...Weighted-average shares outstanding-diluted ...F-12 51,988,000...
  • Page 66
    ... and per share data and percentages) Employee stock options with exercise prices greater than the average market price of...year, including any financial statements for an interim period within that fiscal year. The Company does not expect the adoption of this standard to have a material effect on its ...
  • Page 67
    ... life of these assets. In accordance with Accounting Principles Board Opinion No. 20, Accounting Changes ("APB 20"), the change in life has been accounted for as a change in accounting estimate on a prospective basis from July 1, 2004. New releases will continue to ...
  • Page 68
    ...value is provided. Simultaneously with the change in accounting estimate of expected salvage values, the Company recorded a write.... At the end of the Title Term, the Company generally has the option of returning the DVD title to the studio... library, net ... $ 304,490 (247,458) $ 57,032 $ 484,034 (379...
  • Page 69
    ... leasehold improvements associated with the leasing of the building adjacent to the Company's headquarters in Los Gatos, California. The building is expected to be completed in the first quarter of 2008, at which time the Company will commence amortization of the ...
  • Page 70
    ... purposes of recognizing minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession... at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over...
  • Page 71
    ... class action lawsuit against the Company in California Superior Court, City and County of San Francisco. The complaint asserts claims of... general and administrative expenses associated with the legal fees and the incremental expected costs for the free one month membership to former subscribers, of ...
  • Page 72
    ... deterred from entering the online DVD rental market by the Company's patents. The complaint purports to be on behalf ... adopted the 2002 Employee Stock Purchase Plan, which reserved a total of 1,166,666 .... The 2002 Employee Stock Purchase Plan also provides for annual increases in the number of shares...
  • Page 73
    ... amount as the Company's Board of Directors may determine. Under the 2002 Employee Stock Purchase Plan,...were available for future issuance under the 2002 Employee Stock Purchase Plan. Stock Option ...issued under the 1997 Stock Plan as of the effective date of the Company's initial public offering were ...
  • Page 74
    ... Remaining Shares Available Number of Weighted-Average Contractual Term Intrinsic Value for Grant Shares Exercise Price (in Thousands) ...'s closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the...
  • Page 75
    ...of shares issued under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. The following table summarizes ... The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions and...
  • Page 76
    ... paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The weighted-... table summarizes stock-based compensation expense, net of tax, related to stock option plans and employee stock purchases under SFAS 123R which was ...
  • Page 77
    ... because of its history of losses, limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result of the Company's analysis of expected future income at December 31, 2005, it was considered more ...
  • Page 78
    ..., but not more than the statutory limits set by the Internal Revenue Service. The Company matches employee contributions at the discretion of the Board of Directors. During 2004, 2005 and 2006, the Company's matching contributions totaled $379...
  • Page 79
    ... this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: February..., as his true and lawful attorneys-in-fact and agents, with full power of substitution... financial and accounting officer) Director Director Director Director Director Director February...
  • Page 80
    ..., Inc. Lease between Sobrato Interest II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive Severance and Retention Incentive Plan Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature ...
  • Page 81
    Exhibit Number Exhibit Description Form Incorporated by Reference File No. Exhibit Filing Date Filed Herewith 31.2 Certification of Chief ... Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan â€
  • Page 82
    EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Netflix, Inc.: We consent to the incorporation by reference in the Registration Statements on ..., 333-123501 and 333-136403) of Netflix, Inc. of our reports dated February 27, 2007, relating ...
  • Page 83
    ...OF 2002 I, Reed Hastings, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge,... and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the ...
  • Page 84
    ...OF 2002 I, Barry McCarthy, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge... and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the ...
  • Page 85
    ...-Oxley Act of 2002, that the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13... Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13...
  • Page 86
    ... Chairman, Ask Jeeves, Inc. Timothy M. Haley1,2 Managing Director, Redpoint Ventures Jay Hoag2,3 General Partner, Technology Crossover Ventures Michael N. Schuh1 ...ix, Inc. 100 Winchester Circle Los Gatos, CA 95032 Phone: (408) 540-3639 SENIOR MANAGEMENT Reed Hastings Chief Executive Officer, ...
  • Page 87
    Netflix, Inc. • 100 Winchester Circle • Los Gatos, CA 95032 • www.netflix.com


Type your new search above

The manual viewer requires the flash plugin to be installed and enabled.
To view this page ensure that Adobe Flash Player version 10 or greater is installed.

manual table of contents:

  • NetFlix 2006 Annual Report - Page 1
    2006 Annual Report
  • NetFlix 2006 Annual Report - Page 2
  • NetFlix 2006 Annual Report - Page 3
    ... Netflix. We added a record number of new subscribers, invested in the development of our Internet delivery feature, and significantly exceeded ... positioned to reach our long-term objective of leading the online subscription movie rental business. 20 0 6 RESULTS In 2006, aggressive investment in ...
  • NetFlix 2006 Annual Report - Page 4
    ... for us during this transition period. During the early years of Internet delivery when content is limited, the combination of our DVD by mail and Internet delivery service will offer a breadth of title selection unmatched by stand-alone Internet-only ...
  • NetFlix 2006 Annual Report - Page 5
    ... make the best online movie rental service even better by enhancing our Web site, ... invest at least $40 million in continued improvement of Internet delivery, with a focus on content availability and ... $1 billion in revenues in the seven years since we invented online subscription DVD rental in 1999. ...
  • NetFlix 2006 Annual Report - Page 6
    PERFORMANCE NETFLIX 2006 ANNUAL REPORT Subscribers (in thousands) 6,316 4,179 2,610 1,487 '03 '04 '05 '06 Revenue (in millions) $997 $682 $501 $270 '03 '04 '05 '06 Net Income (in millions) $49 $42 $22 $7 '03 '04 '05* '06 *2005 Net Income includes the benefit of realized ...
  • NetFlix 2006 Annual Report - Page 7
    ... period from to Commission File Number: 000-49802 (Exact name of Registrant as specified in its charter) Netflix, Inc. 100 Winchester Circle ... the registrant, based upon the closing sales price for the registrant's common stock, as reported in the NASDAQ Global Select Market System, was $1,242,174,...
  • NetFlix 2006 Annual Report - Page 8
    NETFLIX, INC. TABLE OF CONTENTS Page PART I Item 1. Item 1A. Item 1B. Item...and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 ... Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and ...
  • NetFlix 2006 Annual Report - Page 9
    ... and impacts relating to our pricing strategy, delivery time, volume of movie rentals and growth of the online DVD rental market, our DVD ...statement, except as may otherwise be required by law. Item 1. Business We are the largest online movie rental subscription service providing more than 6,300,000...
  • NetFlix 2006 Annual Report - Page 10
    .... First, despite the large number of available titles on DVD, consumers lack a deep selection of titles from existing subscription channels and traditional video rental outlets. Subscription channels, pay-per-view and video-on-demand services continue to offer a ...
  • NetFlix 2006 Annual Report - Page 11
    ... outlets, video retailers, subscription channels, pay-per-view and VOD services. To maximize our selection of DVD titles, we continuously add newly released DVD titles to .... After receipt of returned DVDs, we mail subscribers the next available DVD in their queue of selected titles. We ...
  • NetFlix 2006 Annual Report - Page 12
    ...allows subscribers to quickly select current titles, reserve upcoming releases and build an individual queue for future viewing using our ... implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and customer...
  • NetFlix 2006 Annual Report - Page 13
    ... random control testing extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware and software co-located at a service provider offering ... essential infrastructure. We manage our Web site 24 hours a day, seven days a week. We ...
  • NetFlix 2006 Annual Report - Page 14
    ... with our subscribers in order to continually improve our Web site and our service. Our customer service center is open seven days a week.... to HBO, rent a DVD from Blockbuster, buy or download a DVD from Wal-Mart or Amazon and subscribe to Netflix, or some combination thereof, all in the same month. ...
  • NetFlix 2006 Annual Report - Page 15
    ... available to digital cable subscribers in major metropolitan areas, such as New York, Boston, Los Angeles and San Francisco. Downloading of movies over the Internet to a personal computer is currently available from providers, such as iTunes, Vongo, ...
  • NetFlix 2006 Annual Report - Page 16
    ..., California 95032, and our telephone number is (408) 540-3700. We maintain a Web site at www.netflix.com. The contents of our Web site... Annual Report on Form 10-K. In this Annual Report on Form 10-K, "Netflix," the "Company," "we" and the "registrant" refer to Netflix, Inc....
  • NetFlix 2006 Annual Report - Page 17
    ... and national brand recognition. We could also face competition from potential new entrants into the online DVD rental or movie download markets. For example, we have seen the entry of direct competition from Blockbuster, which launched its online ...
  • NetFlix 2006 Annual Report - Page 18
    ..., or could include: • video rental outlets, such as Blockbuster and Movie Gallery; • online DVD subscription rental sites, such as Blockbuster Online; • pay-per-view and VOD services; • movie retail stores, such ...
  • NetFlix 2006 Annual Report - Page 19
    ... format for viewing in-home filmed entertainment. At present, DVD sales account for approximately 43%... of the exclusive window for movie rental and retail sales varies. Our business could ... Company announced an arrangement with Blockbuster by which Weinstein would distribute content on DVDs for rental...
  • NetFlix 2006 Annual Report - Page 20
    ... and BluRay, and those released for online delivery may be more expensive to acquire than in DVD format. The rate of customer acceptance and adoption... attract and retain a large number of owners of DVD players who have traditionally relied on store-based rental outlets and persuade...
  • NetFlix 2006 Annual Report - Page 21
    ..., become cost prohibitive or are adverse to our business. If companies that currently promote our service decide ... exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers and to return DVDs to us from our subscribers. We are subject to risks associated with using the public ...
  • NetFlix 2006 Annual Report - Page 22
    ...replicating our DVDs use materials and methods more likely to break during delivery ...increase in postage will take place. The U.S. Postal Service continues to focus on plans to reduce its costs and ...If the U.S. Postal Service were to change any policies relative to the requirements of first-class mail...
  • NetFlix 2006 Annual Report - Page 23
    ... associated with accurately predicting title demand could increase if we are required to directly purchase more titles. If the sales price of DVDs to retail consumers decreases, our ability to attract new subscribers may be adversely affected. The cost ...
  • NetFlix 2006 Annual Report - Page 24
    ... and our Sunnyvale-based shipping center are located in the San Francisco Bay Area. In the event of ... and our Sunnyvale-based shipping center are located in the San Francisco Bay Area. Our business ... our fulfillment and delivery operations due to disruptions in service in the San Francisco Bay Area or...
  • NetFlix 2006 Annual Report - Page 25
    ... approves payment of the orders. From time to time, fraudulent credit cards are used on our Web site to obtain service and access our DVD inventory. Typically, these ... credit cards and debit cards and, to a lesser extent, electronic checks. These rules, regulations and 17
  • NetFlix 2006 Annual Report - Page 26
    ... related to, among other things, our Web site, our recommendation service, title selection processes and marketing activities. Trademark, copyright, patent ... rights extend to our technology, business processes and the content on our Web site. We use the intellectual property of third ...
  • NetFlix 2006 Annual Report - Page 27
    ... designees. The regulation of domain names in the United States may change in the near future. Governing .... We are required to amortize capitalized film production costs over the expected revenue streams .... If government regulation of the Internet or other areas of our business changes or if consumer ...
  • NetFlix 2006 Annual Report - Page 28
    ... if consumer attitudes toward use of the Internet change, consumers may become unwilling to select their entertainment online or otherwise provide us... have increased and may continue to increase our costs. Changes in the laws and regulations affecting public companies, including the provisions of the...
  • NetFlix 2006 Annual Report - Page 29
    ... unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction... quarter of 2003, we began granting stock options to our employees on a monthly basis. The vesting periods provide for options to vest immediately, in comparison with the ...
  • NetFlix 2006 Annual Report - Page 30
    ...the inherent limitations in predicting the future, forecasts of our revenues, gross margin, operating expenses, number of paying subscribers, number of DVDs shipped per day and ...center, processing and shipping center for San Francisco Bay Area Customer service center Encoding We operate...
  • NetFlix 2006 Annual Report - Page 31
    ...Issuer Purchases of Equity Securities Our common stock has traded on the NASDAQ Global Select Market and its predecessor, the...public offering on May 23, 2002. The following table sets forth the intraday high and low sales prices per share of our common stock for the periods indicated, as reported by...
  • NetFlix 2006 Annual Report - Page 32
    ... providers, Internet software and services companies and e-commerce companies. In previous years, the Company compared its total cumulative stockholder return with the Philadelphia TheStreet.com Internet Sector Index. The Company has elected ...
  • NetFlix 2006 Annual Report - Page 33
    ... Data The following selected financial data is not necessarily indicative of results of future operations ..." and "Item 8. Financial Statements and Supplementary Data." Year Ended December 31,...) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross...
  • NetFlix 2006 Annual Report - Page 34
    ... expenses divided by total gross subscriber additions during the period. Item 7. Overview Our Business We are the largest online movie rental subscription service providing more than 6,300,000 subscribers access to a comprehensive library of ...
  • NetFlix 2006 Annual Report - Page 35
    ...be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, ...agreements. We acquire DVDs for the purpose of renting them to our subscribers and earning subscription rental revenues and as such, we consider our DVD library to be...
  • NetFlix 2006 Annual Report - Page 36
    ...these assets. In accordance with Accounting Principles Board Opinion No. 20, Accounting Changes ("APB ...has been accounted for as a change in accounting estimate on a prospective basis from July 1, 2004. New releases ... employee stock purchase plan shares. The Black-Scholes option-pricing model requires...
  • NetFlix 2006 Annual Report - Page 37
    ... incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is expected to be more reflective of market ... the first quarter of 2006. We grant stock options to our employees on a monthly basis. Such stock options ...
  • NetFlix 2006 Annual Report - Page 38
    ... at the same time. Cost of Revenues: Subscription: We acquire titles for our library through traditional direct purchase and through revenue ..., we revised the estimate of useful life for the back-catalog DVD library from one to three years. New releases will continue to be amortized over a one-year ...
  • NetFlix 2006 Annual Report - Page 39
    ...maintaining and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers... of 2003, we began granting stock options to our employees on a monthly basis. The vesting periods provide for options to vest immediately, in comparison with the...
  • NetFlix 2006 Annual Report - Page 40
    ... change over prior period ...Other data: Average number of paying subscribers ...Percentage change over prior period ...Average monthly revenue per paying ... a decline in average monthly subscription revenue per paying subscriber. We believe the increase in the number of paying 32
  • NetFlix 2006 Annual Report - Page 41
    ... of our lower cost subscription plans. We expect the average revenue per paying subscriber to ... growth in the average number of paying subscribers 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...
  • NetFlix 2006 Annual Report - Page 42
    ... increase in the number of average paying subscribers offset by a slight decline in monthly movie rentals ... increase in the number of average paying subscribers offset by a slight decline in monthly movie rentals ... related to the change in estimate of useful life of our back-catalog DVD library made ...
  • NetFlix 2006 Annual Report - Page 43
    ... life of our back-catalog DVD library and the rapid growth of lower priced plans which produce a higher margin than our most popular subscription plan of ... in additional expenses related to our instant viewing feature. As a result, we anticipate that cost of subscription will increase ...
  • NetFlix 2006 Annual Report - Page 44
    ... part by a decrease in cost of providing free trials associated with our lower priced plans coupled with a slight decline in personnel-related costs. The increase in marketing expenses in ... partially by a decrease in the cost of providing free trials associated with our new lower priced plans, ...
  • NetFlix 2006 Annual Report - Page 45
    ... of legal defense costs of $0.9 million) related to the proposed settlement costs of the Chavez vs. Netflix, Inc. lawsuit. As a percentage of revenues, the...to 2004 was primarily attributable to an increase in the cost of DVD sales. Interest and Other Income Year Ended December 31, 2004 2005 2006 (in ...
  • NetFlix 2006 Annual Report - Page 46
    ...In the third quarter of 2006, we began classifying changes in Accounts payable related to the acquisition of our DVD library and Property and ... cash outflows related to investing activities. Changes in Accounts payable related to acquisitions of DVD library and Property and equipment were...
  • NetFlix 2006 Annual Report - Page 47
    ... in proceeds from issuance of common stock under our employee stock plans. Contractual Obligations... relate primarily to acquisitions for our DVD library and online titles. Our purchase..., minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment...
  • NetFlix 2006 Annual Report - Page 48
    ... recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance ...SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect the ...
  • NetFlix 2006 Annual Report - Page 49
    ...'s rules and forms, and that such information is accumulated and communicated to our management,... and Chief Financial Officer, does not expect that our disclosure controls and... accounting principles. This material weakness resulted in a material error in the Company's consolidated financial statements...
  • NetFlix 2006 Annual Report - Page 50
    ... has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein. (c) Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the ...
  • NetFlix 2006 Annual Report - Page 51
    ...Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual Meeting of ... with respect to principal independent registered public accounting firm fees and services is incorporated by reference from the...
  • NetFlix 2006 Annual Report - Page 52
    ... by the registrant with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated 1997 Stock Plan ...Inc. Lease between Sobrato Interest II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive Severance and Retention ...
  • NetFlix 2006 Annual Report - Page 53
    ...No. Exhibit Filing Date Filed Herewith 23.1 24 31.1 Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature page)...irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan †45
  • NetFlix 2006 Annual Report - Page 54
    NETFLIX, INC. INDEX TO FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December ... Years Ended December 31, 2004, 2005 and 2006 ...Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and ...
  • NetFlix 2006 Annual Report - Page 55
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc.: We have audited ... have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc.'s internal control over ...
  • NetFlix 2006 Annual Report - Page 56
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc.: We have audited management's assessment, ... the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Netflix, Inc. ...
  • NetFlix 2006 Annual Report - Page 57
    NETFLIX, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)... ...Other current assets ...Total current assets ...DVD library, net ...Intangible assets, net ...... and Stockholders' Equity Current liabilities: Accounts payable ...Accrued expenses ...Deferred revenue ...Total ...
  • NetFlix 2006 Annual Report - Page 58
    NETFLIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2004 2005 2006 Revenues ...$500,611 Cost of revenues: Subscription ...273,401 Fulfillment expenses* ...58,311 Total cost of revenues ...Gross profit ......
  • NetFlix 2006 Annual Report - Page 59
    ... income ... Exercise of options ...Issuance of common stock under employee stock purchase plan ...Issuance of...income ... Exercise of options ...Issuance of common stock under employee stock purchase plan ...Issuance ... of options ...1,379,012 Issuance of common stock under employee stock purchase plan ...
  • NetFlix 2006 Annual Report - Page 60
    NETFLIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, ... ...Amortization of DVD library ...Amortization of intangible assets ...Stock-based compensation expense ...Excess ...Net cash provided by financing activities ...Effect of exchange rate changes on cash and cash ...
  • NetFlix 2006 Annual Report - Page 61
    ...the "Company") was incorporated on August 29, 1997 and began operations on April 14, 1998. The Company is an online movie rental subscription service, providing more than 6,300,000 subscribers with access to a comprehensive library of more than...
  • NetFlix 2006 Annual Report - Page 62
    ...: Condensed Consolidated Statements of Cash Flows Year Ended December 31, 2004 2005 Changes in Accounts Payable: As ... In the third quarter of 2004, the Company prepared to launch its online movie subscription service in the United Kingdom. However, in October 2004, the Company announced its ...
  • NetFlix 2006 Annual Report - Page 63
    ... plaintiffs' attorneys' fees and expenses in the Chavez vs. Netflix, Inc. lawsuit. Amortization of DVD Library The Company amortizes its DVD library... be 1 year and 3 years, respectively. In estimating the useful life of its DVD library, the Company takes into account library utilization as well as an...
  • NetFlix 2006 Annual Report - Page 64
    ...payroll and related costs incurred in testing, maintaining and modifying the Company's Web Site, its recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and...
  • NetFlix 2006 Annual Report - Page 65
    ... as a reduction of cost of revenues when recognized in the Company's statements of operations. Income Taxes The Company accounts ... pursuant to our employee stock purchase plan using the treasury stock method. The shares ... stock options ...Weighted-average shares outstanding-diluted ...F-12 51,988,000...
  • NetFlix 2006 Annual Report - Page 66
    ... and per share data and percentages) Employee stock options with exercise prices greater than the average market price of...year, including any financial statements for an interim period within that fiscal year. The Company does not expect the adoption of this standard to have a material effect on its ...
  • NetFlix 2006 Annual Report - Page 67
    ... life of these assets. In accordance with Accounting Principles Board Opinion No. 20, Accounting Changes ("APB 20"), the change in life has been accounted for as a change in accounting estimate on a prospective basis from July 1, 2004. New releases will continue to ...
  • NetFlix 2006 Annual Report - Page 68
    ...value is provided. Simultaneously with the change in accounting estimate of expected salvage values, the Company recorded a write.... At the end of the Title Term, the Company generally has the option of returning the DVD title to the studio... library, net ... $ 304,490 (247,458) $ 57,032 $ 484,034 (379...
  • NetFlix 2006 Annual Report - Page 69
    ... leasehold improvements associated with the leasing of the building adjacent to the Company's headquarters in Los Gatos, California. The building is expected to be completed in the first quarter of 2008, at which time the Company will commence amortization of the ...
  • NetFlix 2006 Annual Report - Page 70
    ... purposes of recognizing minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession... at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over...
  • NetFlix 2006 Annual Report - Page 71
    ... class action lawsuit against the Company in California Superior Court, City and County of San Francisco. The complaint asserts claims of... general and administrative expenses associated with the legal fees and the incremental expected costs for the free one month membership to former subscribers, of ...
  • NetFlix 2006 Annual Report - Page 72
    ... deterred from entering the online DVD rental market by the Company's patents. The complaint purports to be on behalf ... adopted the 2002 Employee Stock Purchase Plan, which reserved a total of 1,166,666 .... The 2002 Employee Stock Purchase Plan also provides for annual increases in the number of shares...
  • NetFlix 2006 Annual Report - Page 73
    ... amount as the Company's Board of Directors may determine. Under the 2002 Employee Stock Purchase Plan,...were available for future issuance under the 2002 Employee Stock Purchase Plan. Stock Option ...issued under the 1997 Stock Plan as of the effective date of the Company's initial public offering were ...
  • NetFlix 2006 Annual Report - Page 74
    ... Remaining Shares Available Number of Weighted-Average Contractual Term Intrinsic Value for Grant Shares Exercise Price (in Thousands) ...'s closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the...
  • NetFlix 2006 Annual Report - Page 75
    ...of shares issued under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. The following table summarizes ... The Company believes that implied volatility of publicly traded options in its common stock is more reflective of market conditions and...
  • NetFlix 2006 Annual Report - Page 76
    ... paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The weighted-... table summarizes stock-based compensation expense, net of tax, related to stock option plans and employee stock purchases under SFAS 123R which was ...
  • NetFlix 2006 Annual Report - Page 77
    ... because of its history of losses, limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result of the Company's analysis of expected future income at December 31, 2005, it was considered more ...
  • NetFlix 2006 Annual Report - Page 78
    ..., but not more than the statutory limits set by the Internal Revenue Service. The Company matches employee contributions at the discretion of the Board of Directors. During 2004, 2005 and 2006, the Company's matching contributions totaled $379...
  • NetFlix 2006 Annual Report - Page 79
    ... this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: February..., as his true and lawful attorneys-in-fact and agents, with full power of substitution... financial and accounting officer) Director Director Director Director Director Director February...
  • NetFlix 2006 Annual Report - Page 80
    ..., Inc. Lease between Sobrato Interest II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive Severance and Retention Incentive Plan Consent of Independent Registered Public Accounting Firm Power of Attorney (see signature ...
  • NetFlix 2006 Annual Report - Page 81
    Exhibit Number Exhibit Description Form Incorporated by Reference File No. Exhibit Filing Date Filed Herewith 31.2 Certification of Chief ... Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan â€
  • NetFlix 2006 Annual Report - Page 82
    EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Netflix, Inc.: We consent to the incorporation by reference in the Registration Statements on ..., 333-123501 and 333-136403) of Netflix, Inc. of our reports dated February 27, 2007, relating ...
  • NetFlix 2006 Annual Report - Page 83
    ...OF 2002 I, Reed Hastings, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge,... and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the ...
  • NetFlix 2006 Annual Report - Page 84
    ...OF 2002 I, Barry McCarthy, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge... and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the ...
  • NetFlix 2006 Annual Report - Page 85
    ...-Oxley Act of 2002, that the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13... Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13...
  • NetFlix 2006 Annual Report - Page 86
    ... Chairman, Ask Jeeves, Inc. Timothy M. Haley1,2 Managing Director, Redpoint Ventures Jay Hoag2,3 General Partner, Technology Crossover Ventures Michael N. Schuh1 ...ix, Inc. 100 Winchester Circle Los Gatos, CA 95032 Phone: (408) 540-3639 SENIOR MANAGEMENT Reed Hastings Chief Executive Officer, ...
  • NetFlix 2006 Annual Report - Page 87
    Netflix, Inc. • 100 Winchester Circle • Los Gatos, CA 95032 • www.netflix.com