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  • Page 1
    2006 Annual Report
  • Page 2
  • Page 3
    ... 2006 ANNUAL REPORT DEAR FELLOW SHARE HOL DERS: 2006 was a noteworthy year for Netflix. We added a record number of new subscribers, invested in the development of our Internet delivery feature, and significantly exceeded our goals for earnings. And ...
  • Page 4
    ... on our subscriber growth rate. At the same time, there is a growing array of services offering Internet delivery of movies, although none has ...face of these challenges, our strategy for achieving online movie rental leadership is to continue to aggressively grow our DVD subscription business and to ...
  • Page 5
    ... NETFLIX 2006 ANNUAL REPORT CONTI NUING THE MOME N T UM IN 2007 In 2007 we will make the best online movie rental service even better by enhancing our Web site, extending the reach of our overnight delivery infrastructure, and applying new ...
  • 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 benen..
  • Page 7
    ... June 30, 2006, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant's common stock, as reported in the NASDAQ Global Select Market System, was $1,242,174,295. Shares of ...
  • Page 8
    ...Certain Relationships and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 43 43... Stockholder Matters and Issuer Purchases of Equity Securities ...Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of ...
  • Page 9
    ... and impacts relating to our pricing strategy, delivery time, volume of movie rentals and growth of the online DVD rental market, our ..., 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 subscribers ...
  • Page 10
    ... We maintain a nationwide network of shipping centers that allow us to provide fast delivery and return service to our subscribers. We are focused on ... and traditional video rental outlets. Subscription channels, pay-per-view and video-on-demand services continue to offer ...
  • Page 11
    ... provide subscribers a broader selection of DVD titles than video rental outlets, video retailers, subscription channels, pay-per-view and ... mailers. After receipt of returned DVDs, we mail subscribers the next available DVD in their queue of selected titles. We have ...
  • Page 12
    ... plan, develop and maintain proprietary technology to implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and customer support. We offer features such as our social ...
  • Page 13
    ... extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware and software co-located ... connections, power, air conditioning and other essential infrastructure. We manage our Web site 24 hours a day, seven days a week. We utilize...
  • Page 14
    ...a defined period of time. After the revenue sharing period expires for a title, we generally have the option of returning the title to the ... convenience and price. We believe that our scalable business model, our subscription service with home delivery and access to our comprehensive library of more ...
  • Page 15
    ... may return DVDs delivered to them from Blockbuster Online to Blockbuster stores in exchange for an in-store rental.... of online subscription rental, the broad and deep selection of DVD titles we offer ... into rental of online delivered content, the download-to-own segment and the advertising-supported ...
  • Page 16
    ... Circle, Los Gatos, 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 are not incorporated in, or otherwise to be regarded as part of, this Annual Report on Form 10-K. In this ...
  • Page 17
    ...financial resources 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, ...
  • Page 18
    ... subscribe to HBO, rent a DVD from Blockbuster, buy or download a DVD from Wal-Mart or Amazon and ... and Movie Gallery; • online DVD subscription rental sites, such as Blockbuster Online; • pay-..., aggressive pricing policies and devote substantially more resources to marketing and Web site ...
  • Page 19
    ... nine months after theatrical release to pay-per-view and VOD, one year ... Company announced an arrangement with Blockbuster by which Weinstein would distribute content on DVDs for rental ... by Blockbuster. In so doing, they contractually prohibited certain distributors from selling the DVDs to rental ...
  • Page 20
    ... adversely affected. With our unlimited plans, there is no established limit to the number of movies that subscribers may rent. We are continually ... 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 of ...
  • Page 21
    ...rely heavily on our proprietary technology to process deliveries and returns of our DVDs and to manage other aspects of our operations, and the...We use complex proprietary software to process deliveries and returns of our DVDs and to manage other aspects of our operations....
  • Page 22
    ... films in high definition format on HD-DVDs and BluRay DVDs. These new DVDs have ... DVDs were to increase, or the durability of DVDs deteriorate, our costs of delivery and fulfillment processing ... our recommendation service to function most effectively, it must access a large database of user ratings. ...
  • Page 23
    ... a low initial payment with additional payments made only if our subscribers rent the DVD. During the course of our revenue ...subscribers may be adversely affected. The cost of manufacturing DVDs is substantially less than the price for which new DVDs are generally sold in the retail market. Thus, we ...
  • Page 24
    ...potential subscribers access our service through our Web site, where the title selection process is integrated with our delivery processing systems and ... computer hardware used to operate our Web site and our online delivery of content are hosted at the facilities of a third party provider. Hardware ...
  • Page 25
    ..., even when the associated financial institution 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 have not ...
  • Page 26
    ...among other things, our Web site, our recommendation service, title selection processes and marketing ...our inability to use our current Web site or our recommendation service or inability to market our service ... make it more difficult for users to find our Web site and our service. The acquisition and...
  • Page 27
    ... the associated films. The amount of film production costs that will be amortized each period depends on how much future revenue we expect to receive from each film. Unamortized film production costs are evaluated for impairment each reporting period ...
  • Page 28
    ... of the Internet, including laws limiting Internet neutrality, could decrease the demand for our subscription service and increase our cost of doing .... Further, we may not be able to effectively market our services online to users of the Internet. If we are unable to ...
  • Page 29
    ... plans by us or others; • competition, including the introduction of new competitors, their pricing strategies ..., in comparison with the three to four-year vesting periods for stock options granted prior to the third ... 2004, 2005 and 2006, respectively. We expect our stock-based compensation 21
  • Page 30
    ...-pricing model, used by us, requires the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. If factors change and we employ different assumptions for estimating stock-...
  • Page 31
    ... symbol "NFLX" since our initial 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 the NASDAQ Global Select Market. 2005 ...
  • Page 32
    ... 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 ... $450.00 $400.00 $350.00 $300.00 Dollars $250.00 $200.00 $150.00 $100.00 ...
  • Page 33
    ... (in thousands, except per share data) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross profit ...Operating expenses: Technology and development ...Marketing ...General and administrative ......
  • Page 34
    ... marketing 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...
  • Page 35
    ...the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we ...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
    ... of 2004, we determined that we were selling fewer previously rented DVDs than estimated but at an average selling price higher than historically ... the Title Term, we generally have the option of returning the DVD title to the studio, destroying the title or purchasing the title. ...
  • Page 37
    ... through the first quarter of 2003, limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result of our analysis of expected future income at December 31, 2005, it was considered more likely than ...
  • Page 38
    ...subscribers as a reduction of revenues. We offer a variety of subscription plans, starting at $4.99 a month, that allow ...fewer or more titles at the same time. Cost of Revenues: Subscription: We acquire titles for our ...been provided effective July 1, 2004. For those DVDs that we do not expect to sell,...
  • Page 39
    ... testing, maintaining and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications...from sales of DVDs and associated cost of DVD sales. Cost of DVD sales includes the net book value of the...
  • Page 40
    ... revenues ratably during each subscriber's monthly subscription period. In addition, we generate a small portion of our revenues from the sale of advertising. The ... in part by a decline in average monthly subscription revenue per paying subscriber. We believe the increase in the number of paying 32
  • Page 41
    ... average revenue per paying subscriber to continue to decline as we promote our lower priced subscription plans. The increase in our revenues in 2005 as compared to 2004 ... $17.99. In addition, we introduced new lower priced subscription plans in the second quarter of 2005. Churn declined...
  • Page 42
    ... of our lower priced plans. • Postage and packaging expenses increased by 48 percent... and the number of DVDs mailed to paying subscribers, as well as the first class postage rate... to revenue sharing agreements mailed to paying subscribers. The increase in cost of subscription in absolute dollars...
  • Page 43
    ...in overall usage and the continued popularity of our lower-priced plans. The increase in postage rates by 2 cents effective January 8, 2006 ... growth of lower priced plans which produce a higher margin than our most popular subscription plan of $17.99 per month. In addition, the gross margin for 2004 ...
  • Page 44
    ...' experience. Additionally, we continue to develop and enhance solutions for the online delivery of content to our subscribers. As a result, we expect our technology and development expenses to increase in absolute dollars in 2007. ...
  • Page 45
    ... to increase in absolute dollars in 2007 in order to support our growing operations. Gain on Disposal of DVDs Year Ended December 31, 2004 ... to 2004 was primarily attributable to an increase in the cost of DVD sales. Interest and Other Income Year Ended December 31, 2004 ...
  • Page 46
    ... more likely than not to be realizable due to expected future income. In 2004, we recorded an..., but not limited to, the number of subscribers who sign up for our service, the growth or reduction in... efforts, business plans, operating performance and the condition of the capital markets at the time we ...
  • Page 47
    ... quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment of the obligations discussed above is estimated based on information available to us as of December 31,...
  • Page 48
    ... for an interim period within that fiscal year. We do not expect the adoption of this standard to have a material effect on our ... statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on ...
  • Page 49
    ... As previously reported in our annual report on Form 10-K for the year ended December 31, 2005, management identified a material weakness in our ... and procedures did not include adequate management review of the calculations and related supporting documentation to ensure that its ...
  • Page 50
    ... Exchange Act of 1934 as amended (the Exchange Act)). Our management assessed the effectiveness of our internal control ... concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management's assessment of the effectiveness of our internal control over ...
  • Page 51
    ... under the sections "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual Meeting of Stockholders. Item 13. Certain Relationships and Related ...
  • Page 52
    ...with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated ... Plan Amended and Restated 2002 Stock Plan Amended and Restated Stockholders' Rights Agreement ...II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive ...
  • Page 53
    ... we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan †45
  • Page 54
    ..., 2005 and 2006 ...Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 ... Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2004, 2005 and 2006 ...Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 ...
  • Page 55
    ...whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc.'s internal control...
  • Page 56
    ...to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Netflix, Inc. maintained effective internal control over ...
  • 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 ...liabilities ...Deferred rent ...Total liabilities ...Commitments and contingencies Stockholders' equity: Common stock,...
  • 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 ...
  • 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, 2004 2005 2006 Cash ... payments on notes payable and capital lease obligations ...Net cash provided by financing activities ...Effect of exchange rate changes on cash and cash equivalents ...Net increase in ...
  • Page 61
    ...Netflix, Inc. (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 ...
  • Page 62
    ... Condensed Consolidated Statements of Cash Flows Year Ended December 31, 2004 2005 Changes in Accounts Payable: As previously...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
    ... equivalents. The Company's cash and cash equivalents are principally on deposit in short-term asset management ...The useful life of the new-release DVDs and back-catalog DVDs is estimated to be 1 year and 3 years, respectively. In estimating the useful life of its DVD library, the Company takes into ...
  • Page 64
    ... 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 other internal-...
  • Page 65
    ... are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities ...the nearest thousand): 2004 Year Ended December 31, 2005 2006 Weighted-average shares outstanding-basic ......
  • Page 66
    ... financial statements for that fiscal 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 financial position or results of...
  • Page 67
    ... sharing agreements. The Company acquires DVDs for the purpose of renting them to its subscribers and earning subscription rental revenues and...the third quarter of 2004, the Company determined that it was selling fewer previously rented DVDs than estimated but at an average selling price higher than ...
  • Page 68
    ... Cash Flows. At the end of the Title Term, the Company generally has the option of returning the DVD title to the studio, destroying the title or purchasing the title. In addition, the Company remits an ... amortization ...DVD library, net ... $ 304,490 (247,458) $ 57,032 $ 484,034 (379,...
  • Page 69
    ... 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 related leasehold improvements. The ...
  • Page 70
    ...of intended use. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records... Operations. The Company has the option to extend or renew most of its leases which may increase the future ...
  • Page 71
    ... Company's statements regarding DVD delivery times. The Company entered into an amended settlement under which Netflix subscribers who were ... 19, 2005 are eligible to receive a free one-month Netflix membership of either the 1, 2 or 3 DVDs at-a-time unlimited program. The ...
  • Page 72
    ... by third parties. In these circumstances, payment by the Company is conditional on the other party making a claim pursuant to the procedures specified in the ... stock for issuance. The 2002 Employee Stock Purchase Plan also provides for annual increases in the number of shares available for issuance ...
  • Page 73
    ... were reserved for future issuance upon the exercise of outstanding options under the 1997 Stock Plan. ... tax purposes and to increase the limitation on the number of options that can be granted annually to any individual ...500,000. Options granted under the 2002 Stock Plan generally expire in 10 years,...
  • Page 74
    ... 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 ... on the fair market value of the Company's common stock. Total intrinsic value of options exercised for the years ended December 31, 2004, 2005 and 2006 was $...
  • Page 75
    ... Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price (Years) Options Exercisable Exercise Price Number of Options Number of...2006 Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected life (in years) ... 0% 78% 2.23% 1.85 0% 59% 3.67% 3.08 0% 48% 4....
  • Page 76
    ...-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The weighted-average ...
  • Page 77
    ...portions of the deferred tax assets and liabilities are presented below: Year Ended December 31, 2005 2006 Deferred tax assets: ... 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 ...
  • Page 78
    ... per share data and percentages) 10. Employee Benefit Plan The Company maintains a 401(k) savings plan covering ... 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 ...
  • Page 79
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: February 28, 2007 By: /s/ REED HASTINGS Reed Hastings ... of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by ...
  • Page 80
    ...with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated ... Plan Amended and Restated 2002 Stock Plan Amended and Restated Stockholders' Rights Agreement ...II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive ...
  • Page 81
    ... we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan â€
  • Page 82
    ..., and cash flows for each of the years in the three-year period ended December 31, 2006, management's assessment of the effectiveness of internal control over financial ...in this December 31, 2006 annual report on Form 10-K of Netflix, Inc. /s/ KPMG LLP Mountain View, California February ...
  • Page 83
    ... PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT 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, this report does not contain any untrue statement of a material fact ...
  • Page 84
    ... I, Barry McCarthy, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge, this report does not contain ... and report financial information; and b) any fraud, whether or not material, that involves management or other employees who ...
  • Page 85
    ... of the Sarbanes-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 ... of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully ...
  • Page 86
    ..., 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, President, ...
  • Page 87
    Netflix, Inc. • 100 Winchester Circle • Los Gatos, CA 95032 • www.netflix.com


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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
    ... 2006 ANNUAL REPORT DEAR FELLOW SHARE HOL DERS: 2006 was a noteworthy year for Netflix. We added a record number of new subscribers, invested in the development of our Internet delivery feature, and significantly exceeded our goals for earnings. And ...
  • NetFlix 2006 Annual Report - Page 4
    ... on our subscriber growth rate. At the same time, there is a growing array of services offering Internet delivery of movies, although none has ...face of these challenges, our strategy for achieving online movie rental leadership is to continue to aggressively grow our DVD subscription business and to ...
  • NetFlix 2006 Annual Report - Page 5
    ... NETFLIX 2006 ANNUAL REPORT CONTI NUING THE MOME N T UM IN 2007 In 2007 we will make the best online movie rental service even better by enhancing our Web site, extending the reach of our overnight delivery infrastructure, and applying new ...
  • 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 benen..
  • NetFlix 2006 Annual Report - Page 7
    ... June 30, 2006, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant's common stock, as reported in the NASDAQ Global Select Market System, was $1,242,174,295. Shares of ...
  • NetFlix 2006 Annual Report - Page 8
    ...Certain Relationships and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 43 43... Stockholder Matters and Issuer Purchases of Equity Securities ...Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of ...
  • 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 ..., 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 subscribers ...
  • NetFlix 2006 Annual Report - Page 10
    ... We maintain a nationwide network of shipping centers that allow us to provide fast delivery and return service to our subscribers. We are focused on ... and traditional video rental outlets. Subscription channels, pay-per-view and video-on-demand services continue to offer ...
  • NetFlix 2006 Annual Report - Page 11
    ... provide subscribers a broader selection of DVD titles than video rental outlets, video retailers, subscription channels, pay-per-view and ... mailers. After receipt of returned DVDs, we mail subscribers the next available DVD in their queue of selected titles. We have ...
  • NetFlix 2006 Annual Report - Page 12
    ... plan, develop and maintain proprietary technology to implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and customer support. We offer features such as our social ...
  • NetFlix 2006 Annual Report - Page 13
    ... extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware and software co-located ... connections, power, air conditioning and other essential infrastructure. We manage our Web site 24 hours a day, seven days a week. We utilize...
  • NetFlix 2006 Annual Report - Page 14
    ...a defined period of time. After the revenue sharing period expires for a title, we generally have the option of returning the title to the ... convenience and price. We believe that our scalable business model, our subscription service with home delivery and access to our comprehensive library of more ...
  • NetFlix 2006 Annual Report - Page 15
    ... may return DVDs delivered to them from Blockbuster Online to Blockbuster stores in exchange for an in-store rental.... of online subscription rental, the broad and deep selection of DVD titles we offer ... into rental of online delivered content, the download-to-own segment and the advertising-supported ...
  • NetFlix 2006 Annual Report - Page 16
    ... Circle, Los Gatos, 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 are not incorporated in, or otherwise to be regarded as part of, this Annual Report on Form 10-K. In this ...
  • NetFlix 2006 Annual Report - Page 17
    ...financial resources 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, ...
  • NetFlix 2006 Annual Report - Page 18
    ... subscribe to HBO, rent a DVD from Blockbuster, buy or download a DVD from Wal-Mart or Amazon and ... and Movie Gallery; • online DVD subscription rental sites, such as Blockbuster Online; • pay-..., aggressive pricing policies and devote substantially more resources to marketing and Web site ...
  • NetFlix 2006 Annual Report - Page 19
    ... nine months after theatrical release to pay-per-view and VOD, one year ... Company announced an arrangement with Blockbuster by which Weinstein would distribute content on DVDs for rental ... by Blockbuster. In so doing, they contractually prohibited certain distributors from selling the DVDs to rental ...
  • NetFlix 2006 Annual Report - Page 20
    ... adversely affected. With our unlimited plans, there is no established limit to the number of movies that subscribers may rent. We are continually ... 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 of ...
  • NetFlix 2006 Annual Report - Page 21
    ...rely heavily on our proprietary technology to process deliveries and returns of our DVDs and to manage other aspects of our operations, and the...We use complex proprietary software to process deliveries and returns of our DVDs and to manage other aspects of our operations....
  • NetFlix 2006 Annual Report - Page 22
    ... films in high definition format on HD-DVDs and BluRay DVDs. These new DVDs have ... DVDs were to increase, or the durability of DVDs deteriorate, our costs of delivery and fulfillment processing ... our recommendation service to function most effectively, it must access a large database of user ratings. ...
  • NetFlix 2006 Annual Report - Page 23
    ... a low initial payment with additional payments made only if our subscribers rent the DVD. During the course of our revenue ...subscribers may be adversely affected. The cost of manufacturing DVDs is substantially less than the price for which new DVDs are generally sold in the retail market. Thus, we ...
  • NetFlix 2006 Annual Report - Page 24
    ...potential subscribers access our service through our Web site, where the title selection process is integrated with our delivery processing systems and ... computer hardware used to operate our Web site and our online delivery of content are hosted at the facilities of a third party provider. Hardware ...
  • NetFlix 2006 Annual Report - Page 25
    ..., even when the associated financial institution 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 have not ...
  • NetFlix 2006 Annual Report - Page 26
    ...among other things, our Web site, our recommendation service, title selection processes and marketing ...our inability to use our current Web site or our recommendation service or inability to market our service ... make it more difficult for users to find our Web site and our service. The acquisition and...
  • NetFlix 2006 Annual Report - Page 27
    ... the associated films. The amount of film production costs that will be amortized each period depends on how much future revenue we expect to receive from each film. Unamortized film production costs are evaluated for impairment each reporting period ...
  • NetFlix 2006 Annual Report - Page 28
    ... of the Internet, including laws limiting Internet neutrality, could decrease the demand for our subscription service and increase our cost of doing .... Further, we may not be able to effectively market our services online to users of the Internet. If we are unable to ...
  • NetFlix 2006 Annual Report - Page 29
    ... plans by us or others; • competition, including the introduction of new competitors, their pricing strategies ..., in comparison with the three to four-year vesting periods for stock options granted prior to the third ... 2004, 2005 and 2006, respectively. We expect our stock-based compensation 21
  • NetFlix 2006 Annual Report - Page 30
    ...-pricing model, used by us, requires the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. If factors change and we employ different assumptions for estimating stock-...
  • NetFlix 2006 Annual Report - Page 31
    ... symbol "NFLX" since our initial 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 the NASDAQ Global Select Market. 2005 ...
  • NetFlix 2006 Annual Report - Page 32
    ... 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 ... $450.00 $400.00 $350.00 $300.00 Dollars $250.00 $200.00 $150.00 $100.00 ...
  • NetFlix 2006 Annual Report - Page 33
    ... (in thousands, except per share data) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross profit ...Operating expenses: Technology and development ...Marketing ...General and administrative ......
  • NetFlix 2006 Annual Report - Page 34
    ... marketing 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...
  • NetFlix 2006 Annual Report - Page 35
    ...the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we ...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
    ... of 2004, we determined that we were selling fewer previously rented DVDs than estimated but at an average selling price higher than historically ... the Title Term, we generally have the option of returning the DVD title to the studio, destroying the title or purchasing the title. ...
  • NetFlix 2006 Annual Report - Page 37
    ... through the first quarter of 2003, limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result of our analysis of expected future income at December 31, 2005, it was considered more likely than ...
  • NetFlix 2006 Annual Report - Page 38
    ...subscribers as a reduction of revenues. We offer a variety of subscription plans, starting at $4.99 a month, that allow ...fewer or more titles at the same time. Cost of Revenues: Subscription: We acquire titles for our ...been provided effective July 1, 2004. For those DVDs that we do not expect to sell,...
  • NetFlix 2006 Annual Report - Page 39
    ... testing, maintaining and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications...from sales of DVDs and associated cost of DVD sales. Cost of DVD sales includes the net book value of the...
  • NetFlix 2006 Annual Report - Page 40
    ... revenues ratably during each subscriber's monthly subscription period. In addition, we generate a small portion of our revenues from the sale of advertising. The ... in part by 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
    ... average revenue per paying subscriber to continue to decline as we promote our lower priced subscription plans. The increase in our revenues in 2005 as compared to 2004 ... $17.99. In addition, we introduced new lower priced subscription plans in the second quarter of 2005. Churn declined...
  • NetFlix 2006 Annual Report - Page 42
    ... of our lower priced plans. • Postage and packaging expenses increased by 48 percent... and the number of DVDs mailed to paying subscribers, as well as the first class postage rate... to revenue sharing agreements mailed to paying subscribers. The increase in cost of subscription in absolute dollars...
  • NetFlix 2006 Annual Report - Page 43
    ...in overall usage and the continued popularity of our lower-priced plans. The increase in postage rates by 2 cents effective January 8, 2006 ... growth of lower priced plans which produce a higher margin than our most popular subscription plan of $17.99 per month. In addition, the gross margin for 2004 ...
  • NetFlix 2006 Annual Report - Page 44
    ...' experience. Additionally, we continue to develop and enhance solutions for the online delivery of content to our subscribers. As a result, we expect our technology and development expenses to increase in absolute dollars in 2007. ...
  • NetFlix 2006 Annual Report - Page 45
    ... to increase in absolute dollars in 2007 in order to support our growing operations. Gain on Disposal of DVDs Year Ended December 31, 2004 ... to 2004 was primarily attributable to an increase in the cost of DVD sales. Interest and Other Income Year Ended December 31, 2004 ...
  • NetFlix 2006 Annual Report - Page 46
    ... more likely than not to be realizable due to expected future income. In 2004, we recorded an..., but not limited to, the number of subscribers who sign up for our service, the growth or reduction in... efforts, business plans, operating performance and the condition of the capital markets at the time we ...
  • NetFlix 2006 Annual Report - Page 47
    ... quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment of the obligations discussed above is estimated based on information available to us as of December 31,...
  • NetFlix 2006 Annual Report - Page 48
    ... for an interim period within that fiscal year. We do not expect the adoption of this standard to have a material effect on our ... statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on ...
  • NetFlix 2006 Annual Report - Page 49
    ... As previously reported in our annual report on Form 10-K for the year ended December 31, 2005, management identified a material weakness in our ... and procedures did not include adequate management review of the calculations and related supporting documentation to ensure that its ...
  • NetFlix 2006 Annual Report - Page 50
    ... Exchange Act of 1934 as amended (the Exchange Act)). Our management assessed the effectiveness of our internal control ... concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management's assessment of the effectiveness of our internal control over ...
  • NetFlix 2006 Annual Report - Page 51
    ... under the sections "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual Meeting of Stockholders. Item 13. Certain Relationships and Related ...
  • NetFlix 2006 Annual Report - Page 52
    ...with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated ... Plan Amended and Restated 2002 Stock Plan Amended and Restated Stockholders' Rights Agreement ...II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive ...
  • NetFlix 2006 Annual Report - Page 53
    ... we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan †45
  • NetFlix 2006 Annual Report - Page 54
    ..., 2005 and 2006 ...Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 ... Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2004, 2005 and 2006 ...Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 ...
  • NetFlix 2006 Annual Report - Page 55
    ...whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc.'s internal control...
  • NetFlix 2006 Annual Report - Page 56
    ...to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Netflix, Inc. maintained effective internal control over ...
  • 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 ...liabilities ...Deferred rent ...Total liabilities ...Commitments and contingencies Stockholders' equity: Common stock,...
  • 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 ...
  • 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, 2004 2005 2006 Cash ... payments on notes payable and capital lease obligations ...Net cash provided by financing activities ...Effect of exchange rate changes on cash and cash equivalents ...Net increase in ...
  • NetFlix 2006 Annual Report - Page 61
    ...Netflix, Inc. (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 ...
  • NetFlix 2006 Annual Report - Page 62
    ... Condensed Consolidated Statements of Cash Flows Year Ended December 31, 2004 2005 Changes in Accounts Payable: As previously...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
    ... equivalents. The Company's cash and cash equivalents are principally on deposit in short-term asset management ...The useful life of the new-release DVDs and back-catalog DVDs is estimated to be 1 year and 3 years, respectively. In estimating the useful life of its DVD library, the Company takes into ...
  • NetFlix 2006 Annual Report - Page 64
    ... 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 other internal-...
  • NetFlix 2006 Annual Report - Page 65
    ... are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities ...the nearest thousand): 2004 Year Ended December 31, 2005 2006 Weighted-average shares outstanding-basic ......
  • NetFlix 2006 Annual Report - Page 66
    ... financial statements for that fiscal 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 financial position or results of...
  • NetFlix 2006 Annual Report - Page 67
    ... sharing agreements. The Company acquires DVDs for the purpose of renting them to its subscribers and earning subscription rental revenues and...the third quarter of 2004, the Company determined that it was selling fewer previously rented DVDs than estimated but at an average selling price higher than ...
  • NetFlix 2006 Annual Report - Page 68
    ... Cash Flows. At the end of the Title Term, the Company generally has the option of returning the DVD title to the studio, destroying the title or purchasing the title. In addition, the Company remits an ... amortization ...DVD library, net ... $ 304,490 (247,458) $ 57,032 $ 484,034 (379,...
  • NetFlix 2006 Annual Report - Page 69
    ... 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 related leasehold improvements. The ...
  • NetFlix 2006 Annual Report - Page 70
    ...of intended use. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records... Operations. The Company has the option to extend or renew most of its leases which may increase the future ...
  • NetFlix 2006 Annual Report - Page 71
    ... Company's statements regarding DVD delivery times. The Company entered into an amended settlement under which Netflix subscribers who were ... 19, 2005 are eligible to receive a free one-month Netflix membership of either the 1, 2 or 3 DVDs at-a-time unlimited program. The ...
  • NetFlix 2006 Annual Report - Page 72
    ... by third parties. In these circumstances, payment by the Company is conditional on the other party making a claim pursuant to the procedures specified in the ... stock for issuance. The 2002 Employee Stock Purchase Plan also provides for annual increases in the number of shares available for issuance ...
  • NetFlix 2006 Annual Report - Page 73
    ... were reserved for future issuance upon the exercise of outstanding options under the 1997 Stock Plan. ... tax purposes and to increase the limitation on the number of options that can be granted annually to any individual ...500,000. Options granted under the 2002 Stock Plan generally expire in 10 years,...
  • NetFlix 2006 Annual Report - Page 74
    ... 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 ... on the fair market value of the Company's common stock. Total intrinsic value of options exercised for the years ended December 31, 2004, 2005 and 2006 was $...
  • NetFlix 2006 Annual Report - Page 75
    ... Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price (Years) Options Exercisable Exercise Price Number of Options Number of...2006 Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected life (in years) ... 0% 78% 2.23% 1.85 0% 59% 3.67% 3.08 0% 48% 4....
  • NetFlix 2006 Annual Report - Page 76
    ...-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The weighted-average ...
  • NetFlix 2006 Annual Report - Page 77
    ...portions of the deferred tax assets and liabilities are presented below: Year Ended December 31, 2005 2006 Deferred tax assets: ... 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 ...
  • NetFlix 2006 Annual Report - Page 78
    ... per share data and percentages) 10. Employee Benefit Plan The Company maintains a 401(k) savings plan covering ... 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 ...
  • NetFlix 2006 Annual Report - Page 79
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: February 28, 2007 By: /s/ REED HASTINGS Reed Hastings ... of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by ...
  • NetFlix 2006 Annual Report - Page 80
    ...with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated ... Plan Amended and Restated 2002 Stock Plan Amended and Restated Stockholders' Rights Agreement ...II and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan Executive ...
  • NetFlix 2006 Annual Report - Page 81
    ... we make under the Securities Act of 1933 or the Securities 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
    ..., and cash flows for each of the years in the three-year period ended December 31, 2006, management's assessment of the effectiveness of internal control over financial ...in this December 31, 2006 annual report on Form 10-K of Netflix, Inc. /s/ KPMG LLP Mountain View, California February ...
  • NetFlix 2006 Annual Report - Page 83
    ... PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT 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, this report does not contain any untrue statement of a material fact ...
  • NetFlix 2006 Annual Report - Page 84
    ... I, Barry McCarthy, certify that: 1. I have reviewed this Annual Report on Form 10-K of Netflix, Inc.; 2. Based on my knowledge, this report does not contain ... and report financial information; and b) any fraud, whether or not material, that involves management or other employees who ...
  • NetFlix 2006 Annual Report - Page 85
    ... of the Sarbanes-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 ... of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully ...
  • NetFlix 2006 Annual Report - Page 86
    ..., 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, President, ...
  • NetFlix 2006 Annual Report - Page 87
    Netflix, Inc. • 100 Winchester Circle • Los Gatos, CA 95032 • www.netflix.com