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Table of contents

  • Page 1
    2006 Annual Report
  • Page 2
  • Page 3
    ... FELLOW SHARE HOL DERS: 2006 was a noteworthy year for Netflix. We added a record number of new subscribers, invested in the development ...well positioned to reach our long-term objective of leading the online subscription movie rental business. 20 0 6 RESULTS In 2006, aggressive investment in growth ...
  • Page 4
    ... strategy for achieving online movie rental leadership is to continue to aggressively grow our DVD subscription ... our "instant viewing" feature that enables subscribers to watch movies on their PCs. Our large ... of our DVD by mail and Internet delivery service will offer a breadth of title selection ...
  • Page 5
    ...2007 In 2007 we will make the best online movie rental service even better by enhancing our Web site, extending the reach of our... reach 6.3 million subscribers and $1 billion in revenues in the seven years since we invented online subscription DVD rental in 1999. With our intense focus on the current...
  • 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 ...
  • Page 7
    ... 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 common stock beneficially owned by each executive officer and ...
  • Page 8
    ... Relationships and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 43 43...Related Stockholder Matters and Issuer Purchases of Equity Securities ...Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of ...
  • Page 9
    ..., no late fees and no shipping fees. Subscribers select titles at our Web site aided by our proprietary recommendation service, receive ... continue to be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we will be well ...
  • Page 10
    ... seven to nine months after theatrical release to pay-per-view and VOD, one year after theatrical release..., 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 ...
  • Page 11
    ... that we can economically acquire and provide subscribers a broader selection of DVD titles than video rental outlets, video retailers, subscription channels, pay-per-view and VOD services. To maximize our selection of DVD ...
  • Page 12
    ... to implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and ... subscriber's current queue and viewing history, inventory levels and other factors to determine which movies to promote to each subscriber. 4
  • Page 13
    ...testing extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware ...conditions by which subscribers utilize our service and a more detailed description of how our service works can be found at www.netflix.com/TermsOfUse. Merchandising The key to our ...
  • Page 14
    ... easily shift spending from one provider to another. For example, consumers may subscribe 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 ...
  • Page 15
    ... leveraging their store-based business with their online offering through the use of coupons for free in-store rentals for online subscribers. As of year end, Blockbuster has grown their on-line business to approximately 2 million subscribers. We ...
  • Page 16
    ..."Company," "we" and the "registrant" refer to Netflix, Inc. Our investor relations Web site is located at http://ir.netflix.com. We make available, free of charge, on our investor relations Web site under "SEC Filings" our Annual Reports on...
  • Page 17
    ...brand recognition. We could also face competition from potential new entrants into the online DVD rental or movie download markets. For ...online offering with differentiated services, such as its Total Access program, which allows customers to exchange online rentals with in-store rentals. In addition...
  • Page 18
    ... include, 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,...
  • Page 19
    ... entertainment content approximately three to six months after theatrical release to the home video market, seven to nine months after theatrical release to pay-per-view and VOD, one year after theatrical release to satellite and cable and two to...
  • Page 20
    ...operating results may be adversely affected. With our unlimited plans, there is no established limit to the number of movies that subscribers may rent. We... those released for online delivery may be more expensive to acquire than in DVD format. The rate of customer acceptance and ...
  • Page 21
    ... feature, our subscribers will access titles on our Web site through our proprietary movie player software and ... on our business, results of operations and financial condition. If we experience delivery problems or if our subscribers or potential subscribers lose confidence in the U.S. mail system, ...
  • Page 22
    ... break during delivery and handling or we fail to timely deliver DVDs to our subscribers, ... or reducing Saturday delivery service, our ability to timely deliver DVDs could diminish, ... process is designed to accommodate the delivery of one DVD to fulfill a selection. Because of the lightweight nature ...
  • Page 23
    ... toward direct purchasing arrangements as revenue sharing agreements expire. If we cannot renegotiate purchasing arrangements on favorable terms, the cost of acquiring content could increase and our gross margins may be adversely affected. In ...
  • Page 24
    ... in a loss of subscribers. Subscribers and potential subscribers access our service through our Web site, where the title selection process is integrated with our delivery processing systems and software. Our reputation and ability to ...
  • Page 25
    ... to time, fraudulent credit cards are used on our Web site to obtain service and access our DVD inventory. Typically, these ... expenses and adversely affect our business and results of operations. Our subscribers pay for our subscription services predominately using credit cards and debit cards and, ...
  • Page 26
    ...such as our complaint for patent infringement against Blockbuster, Inc. filed in April 2006. Netflix ...trademark application in the European Union for the Netflix name. From time to time we expect to file additional ...other things, our Web site, our recommendation service, title selection processes and ...
  • Page 27
    ... content uploaded from our users in connection with our community-related content or movie reviews. If we become liable, then our business may suffer. Litigation ... us or our customers to potential liability, which in turn could have an adverse effect on our business, results of ...
  • Page 28
    ... neutrality, could decrease the demand for our subscription service and increase our cost of doing business. In addition, if consumer attitudes...devote resources to respond to their requirements. The NASDAQ Global Select Market, on which our common stock is listed, has also adopted comprehensive rules...
  • Page 29
    ... common stock has traded since our May 2002 initial public offering has fluctuated significantly. ..., investors and the financial community; • announcements of developments affecting our business, systems or expansion plans by us or others; • competition, including the introduction of new ...
  • Page 30
    ... 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..., operating expenses, number of paying subscribers, number of DVDs shipped per day and other financial and operating ...
  • Page 31
    ...'s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has traded on the NASDAQ Global Select Market and its predecessor, the NASDAQ National Market, under the symbol "NFLX" since our ...
  • Page 32
    ... companies. In previous years, the Company compared its total cumulative stockholder return with the Philadelphia TheStreet.... on like businesses, including those that would be considered "peers" of the Company. In this transition year, the table... price performance: $500.00 $450.00 $400.00 $350.00 $300...
  • Page 33
    Item 6. Selected Financial Data The following selected financial data is not necessarily indicative ...Results of Operations" and "Item 8. Financial Statements and Supplementary Data." Year Ended December..., except per share data) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses...
  • Page 34
    ... We are the largest online movie rental subscription service providing more than 6,300,000 subscribers access to a comprehensive library... service and a more detailed description of how our service works can be found at www.netflix.com/TermsOfUse. We derive substantially all of ...
  • Page 35
    ... continue to be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we will be .... In estimating the useful life of our DVD library, we take into account library utilization as well as an estimate for ...
  • Page 36
    ...the back-catalog DVD library from a "sum of the months" accelerated method using a one year life to ... periodically evaluate the useful lives and salvage values of our DVD library. Stock-Based Compensation... options and employee stock purchase plan shares. The Black-Scholes option-pricing model requires...
  • Page 37
    ... of publicly traded options in our common stock is expected to be more reflective of market conditions ... years for the other group. We used an estimate of expected life of 4 years for one group and ..., limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result ...
  • Page 38
    .... We record refunds to subscribers as a reduction of revenues. We offer a variety of subscription plans, starting at $4.99 a month, that allow subscribers to keep either ... over a one-year period. We also revised our estimate of salvage values on direct purchase DVDs. For ...
  • Page 39
    ... and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and other ... and capitalized software we use to run our Web site and store our data. Marketing. Marketing ...
  • Page 40
    ...2006 (in thousands, except percentages and average monthly subscription revenue per paying subscriber) Revenues ...Percentage change over prior period ...Other data... 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
    ... cost subscription plans and the price parity of our subscription plans with those offered by competitors. • Service improvements. We continued to make improvements ... areas, including increasing the selection of titles as we expanded our DVD library and enhancing our Web site and ...
  • 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 ... in our customer service and shipping centers and an increase in facility-related costs ...
  • Page 43
    ...2004 was favorably impacted by certain credits received from studios resulting from amendments to revenue sharing agreements. If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to ...
  • Page 44
    ... spending offset in part by a decrease in cost of providing free trials associated with our lower priced plans coupled with a slight ... basis offset partially by a decrease in the cost of providing free trials associated with our new lower priced plans, and by a $2.1 million reduction in liability due...
  • Page 45
    ... in 2007 in order to support our growing operations. Gain on Disposal of DVDs Year Ended December 31, 2004 2005 2006 (in thousands, ...as compared 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 thousands, ...
  • Page 46
    ... to use the net proceeds from the sale of the common stock for general corporate purposes, including working ... service, the growth or reduction in our subscriber base, and our ability to develop new... efforts, business plans, operating performance and the condition of the capital markets at the time we...
  • Page 47
    ... in deferred revenue due to a larger subscriber base and increase in gift subscriptions and ... under our employee stock plans. Contractual Obligations The following table summarizes our..., minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment...
  • Page 48
    ... that fiscal year, including any financial statements for an interim period within that fiscal year. We do not expect the adoption of this ... No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do...
  • Page 49
    ... Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, ...Executive Officer and Chief Financial Officer, does not expect that our disclosure controls ... report on Form 10-K for the year ended December 31, 2005, management identified a material ...
  • Page 50
    ..., our management 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 financial reporting ... affect, our internal control over financial reporting. Item 9B. Other Information ...
  • 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
    ...notes thereto under "Item 8. Financial Statements and Supplementary Data." (3) Exhibits: Exhibit Number Incorporated by ... each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and ... and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan ...
  • 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 ......Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006 ...Notes to Consolidated Financial Statements ... F-2 F-4 ...
  • Page 55
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc... position of Netflix, Inc. and subsidiary as of December 31, 2005 and 2006, and... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc...
  • Page 56
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc... (COSO). Netflix, Inc.'s management is responsible for maintaining effective internal control over financial ... Company Accounting Oversight Board (United States). Those standards require that we plan...
  • Page 57
    ......Other current assets ...Total current assets ...DVD library, net ...Intangible assets, net ...... Stockholders' Equity Current liabilities: Accounts payable ...Accrued expenses ...Deferred revenue ...Total current ...40,589) 414,211 $608,779 See accompanying notes to consolidated financial statements....
  • 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...
  • 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, ... and equipment ...Amortization of DVD library ...Amortization of intangible assets ...Stock-based compensation ... and equipment ...Loss on disposal of short-term investments ...Gain on disposal of DVDs ...Non-...
  • Page 61
    ...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 70,000 movie,...
  • Page 62
    ... 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 withdrawal from the ...
  • Page 63
    ... to 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 estimate for lost or damaged DVDs. See Note 2 for further discussion. Amortization of ...
  • Page 64
    ... is generally one year. Revenue Recognition Subscription revenues are recognized ratably over each subscriber's monthly subscription period. ..., its recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and other ...
  • Page 65
    ...enacted statutory tax rates applicable to future years to differences between the financial statement carrying ... pursuant to our employee stock purchase plan using the treasury stock method. The shares... outstanding-basic ...Effect of dilutive potential common shares: Warrants ...Employee stock options...
  • Page 66
    ...price of excluded outstanding stock options was $30.71, $28.39 and $29.84 for the years ended December ..., 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 ...
  • Page 67
    ... 3 years, respectively. In estimating the useful life of the DVD library, the Company takes into account library utilization as well as an estimate for lost or ... for the back-catalog DVD library from a "sum of the months" accelerated method using a one year life to the same ...
  • Page 68
    ... been provided effective July 1, 2004. For those DVDs that the Company does not expect to sell, no salvage value is provided...the Company's Consolidated Statements of 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...
  • Page 69
    ...years Other equipment ...3-5 years Computer software, including internal-use software ...1-3 years Furniture and fixtures ...3 years Leasehold improvements ...Over life of lease Capital work-in-progress ...Property and equipment, gross ...Less: ...
  • Page 70
    ...rent escalation clauses during the lease terms or for rental payments commencing at a date other than ... minimum rental expenses on a straight-line basis over the terms of the leases in the Consolidated Statements... for the years ended December 31, 2004, 2005 and 2006, respectively. Litigation From time...
  • Page 71
    ... the 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 upgrade in service level and Netflix subscribers who were enrolled in a paid membership before January 15...
  • Page 72
    ...inflated subscription prices because potential competitors were allegedly deterred from entering the online DVD rental market by the Company's patents. The complaint purports to be on behalf of... adopted the 2002 Employee Stock Purchase Plan, which reserved a total of 1,166,666 shares of...
  • Page 73
    ...available for future issuance under the 2002 Employee Stock Purchase Plan. Stock Option Plans In December 1997, the Company adopted the 1997 Stock Plan, which was amended...,333 to 500,000. Options granted under the 2002 Stock Plan generally expire in 10 years, however, they...
  • Page 74
    ...'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 ... 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
    ... Stock Options 2005 2006 Employee Stock Purchase Plan 2004 2005 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% 4.76% 3.93 0% 77% 1.83% ...
  • Page 76
    ... issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the ... following 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
    ... 35 percent to pretax income as a result of the following: Year Ended December 31, 2004 2005 2006 Expected tax expense at U.S. federal ... allowance 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 ...
  • Page 78
    ... contributions totaled $379, $905 and $1,401, respectively. 11. Selected Quarterly Financial Data (Unaudited) March 31 (1) Quarter Ended June 30 (1) September 30 (1) December 31 (2) 2005 Total revenues ...Gross profit ...Net income (loss) ...Net income (loss) per share: ...
  • Page 79
    ... February 28, 2007 Barry McCarthy Chief Financial Officer (principal financial and accounting officer) POWER OF ATTORNEY KNOWN ...Chief Executive Officer and Director (principal executive officer) Chief Financial Officer (principal financial and accounting officer) Director Director Director Director ...
  • Page 80
    ... each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated... 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 ...
  • Page 81
    Exhibit Number Exhibit Description Form Incorporated by Reference File No. Exhibit Filing Date Filed Herewith 31.2 Certification of Chief Financial Officer Pursuant to ..., irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan ...
  • Page 82
    EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Netflix, Inc.: We consent to... comprehensive income, 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...
  • Page 83
    ...assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls ...
  • Page 84
    ...assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls ...
  • Page 85
    ... Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) ...-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(a) ...
  • Page 86
    ...ix headquarters 100 Winchester Circle Los Gatos, CA 95032 STOCK LISTING Netflix, Inc. common stock trades on the Nasdaq Stock Market under the symbol NFLX. Audit ... Winchester Circle Los Gatos, CA 95032 Phone: (408) 540-3639 SENIOR MANAGEMENT Reed Hastings Chief Executive Ofn..
  • 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
    ... FELLOW SHARE HOL DERS: 2006 was a noteworthy year for Netflix. We added a record number of new subscribers, invested in the development ...well positioned to reach our long-term objective of leading the online subscription movie rental business. 20 0 6 RESULTS In 2006, aggressive investment in growth ...
  • NetFlix 2006 Annual Report - Page 4
    ... strategy for achieving online movie rental leadership is to continue to aggressively grow our DVD subscription ... our "instant viewing" feature that enables subscribers to watch movies on their PCs. Our large ... of our DVD by mail and Internet delivery service will offer a breadth of title selection ...
  • NetFlix 2006 Annual Report - Page 5
    ...2007 In 2007 we will make the best online movie rental service even better by enhancing our Web site, extending the reach of our... reach 6.3 million subscribers and $1 billion in revenues in the seven years since we invented online subscription DVD rental in 1999. With our intense focus on the current...
  • 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 ...
  • NetFlix 2006 Annual Report - Page 7
    ... 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 common stock beneficially owned by each executive officer and ...
  • NetFlix 2006 Annual Report - Page 8
    ... Relationships and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...43 43 43 43 43...Related 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
    ..., no late fees and no shipping fees. Subscribers select titles at our Web site aided by our proprietary recommendation service, receive ... continue to be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we will be well ...
  • NetFlix 2006 Annual Report - Page 10
    ... seven to nine months after theatrical release to pay-per-view and VOD, one year after theatrical release..., 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 ...
  • NetFlix 2006 Annual Report - Page 11
    ... that we can economically acquire and provide subscribers a broader selection of DVD titles than video rental outlets, video retailers, subscription channels, pay-per-view and VOD services. To maximize our selection of DVD ...
  • NetFlix 2006 Annual Report - Page 12
    ... to implement the features of our Web site, such as subscription account signup and management, personalized movie merchandising, inventory optimization and ... subscriber's current queue and viewing history, inventory levels and other factors to determine which movies to promote to each subscriber. 4
  • NetFlix 2006 Annual Report - Page 13
    ...testing extensively, including testing service levels, plans, promotions and pricing. Our Web site is run on hardware ...conditions by which subscribers utilize our service and a more detailed description of how our service works can be found at www.netflix.com/TermsOfUse. Merchandising The key to our ...
  • NetFlix 2006 Annual Report - Page 14
    ... easily shift spending from one provider to another. For example, consumers may subscribe 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 ...
  • NetFlix 2006 Annual Report - Page 15
    ... leveraging their store-based business with their online offering through the use of coupons for free in-store rentals for online subscribers. As of year end, Blockbuster has grown their on-line business to approximately 2 million subscribers. We ...
  • NetFlix 2006 Annual Report - Page 16
    ..."Company," "we" and the "registrant" refer to Netflix, Inc. Our investor relations Web site is located at http://ir.netflix.com. We make available, free of charge, on our investor relations Web site under "SEC Filings" our Annual Reports on...
  • NetFlix 2006 Annual Report - Page 17
    ...brand recognition. We could also face competition from potential new entrants into the online DVD rental or movie download markets. For ...online offering with differentiated services, such as its Total Access program, which allows customers to exchange online rentals with in-store rentals. In addition...
  • NetFlix 2006 Annual Report - Page 18
    ... include, 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,...
  • NetFlix 2006 Annual Report - Page 19
    ... entertainment content approximately three to six months after theatrical release to the home video market, seven to nine months after theatrical release to pay-per-view and VOD, one year after theatrical release to satellite and cable and two to...
  • NetFlix 2006 Annual Report - Page 20
    ...operating results may be adversely affected. With our unlimited plans, there is no established limit to the number of movies that subscribers may rent. We... those released for online delivery may be more expensive to acquire than in DVD format. The rate of customer acceptance and ...
  • NetFlix 2006 Annual Report - Page 21
    ... feature, our subscribers will access titles on our Web site through our proprietary movie player software and ... on our business, results of operations and financial condition. If we experience delivery problems or if our subscribers or potential subscribers lose confidence in the U.S. mail system, ...
  • NetFlix 2006 Annual Report - Page 22
    ... break during delivery and handling or we fail to timely deliver DVDs to our subscribers, ... or reducing Saturday delivery service, our ability to timely deliver DVDs could diminish, ... process is designed to accommodate the delivery of one DVD to fulfill a selection. Because of the lightweight nature ...
  • NetFlix 2006 Annual Report - Page 23
    ... toward direct purchasing arrangements as revenue sharing agreements expire. If we cannot renegotiate purchasing arrangements on favorable terms, the cost of acquiring content could increase and our gross margins may be adversely affected. In ...
  • NetFlix 2006 Annual Report - Page 24
    ... in a loss of subscribers. Subscribers and potential subscribers access our service through our Web site, where the title selection process is integrated with our delivery processing systems and software. Our reputation and ability to ...
  • NetFlix 2006 Annual Report - Page 25
    ... to time, fraudulent credit cards are used on our Web site to obtain service and access our DVD inventory. Typically, these ... expenses and adversely affect our business and results of operations. Our subscribers pay for our subscription services predominately using credit cards and debit cards and, ...
  • NetFlix 2006 Annual Report - Page 26
    ...such as our complaint for patent infringement against Blockbuster, Inc. filed in April 2006. Netflix ...trademark application in the European Union for the Netflix name. From time to time we expect to file additional ...other things, our Web site, our recommendation service, title selection processes and ...
  • NetFlix 2006 Annual Report - Page 27
    ... content uploaded from our users in connection with our community-related content or movie reviews. If we become liable, then our business may suffer. Litigation ... us or our customers to potential liability, which in turn could have an adverse effect on our business, results of ...
  • NetFlix 2006 Annual Report - Page 28
    ... neutrality, could decrease the demand for our subscription service and increase our cost of doing business. In addition, if consumer attitudes...devote resources to respond to their requirements. The NASDAQ Global Select Market, on which our common stock is listed, has also adopted comprehensive rules...
  • NetFlix 2006 Annual Report - Page 29
    ... common stock has traded since our May 2002 initial public offering has fluctuated significantly. ..., investors and the financial community; • announcements of developments affecting our business, systems or expansion plans by us or others; • competition, including the introduction of new ...
  • NetFlix 2006 Annual Report - Page 30
    ... 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..., operating expenses, number of paying subscribers, number of DVDs shipped per day and other financial and operating ...
  • NetFlix 2006 Annual Report - Page 31
    ...'s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has traded on the NASDAQ Global Select Market and its predecessor, the NASDAQ National Market, under the symbol "NFLX" since our ...
  • NetFlix 2006 Annual Report - Page 32
    ... companies. In previous years, the Company compared its total cumulative stockholder return with the Philadelphia TheStreet.... on like businesses, including those that would be considered "peers" of the Company. In this transition year, the table... price performance: $500.00 $450.00 $400.00 $350.00 $300...
  • NetFlix 2006 Annual Report - Page 33
    Item 6. Selected Financial Data The following selected financial data is not necessarily indicative ...Results of Operations" and "Item 8. Financial Statements and Supplementary Data." Year Ended December..., except per share data) 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses...
  • NetFlix 2006 Annual Report - Page 34
    ... We are the largest online movie rental subscription service providing more than 6,300,000 subscribers access to a comprehensive library... service and a more detailed description of how our service works can be found at www.netflix.com/TermsOfUse. We derive substantially all of ...
  • NetFlix 2006 Annual Report - Page 35
    ... continue to be the main vehicle for watching movies in the home for the foreseeable future and that by growing a large DVD subscription business, we will be .... In estimating the useful life of our DVD library, we take into account library utilization as well as an estimate for ...
  • NetFlix 2006 Annual Report - Page 36
    ...the back-catalog DVD library from a "sum of the months" accelerated method using a one year life to ... periodically evaluate the useful lives and salvage values of our DVD library. Stock-Based Compensation... options and employee stock purchase plan shares. The Black-Scholes option-pricing model requires...
  • NetFlix 2006 Annual Report - Page 37
    ... of publicly traded options in our common stock is expected to be more reflective of market conditions ... years for the other group. We used an estimate of expected life of 4 years for one group and ..., limited profitable quarters to date and the competitive landscape of online DVD rentals. As a result ...
  • NetFlix 2006 Annual Report - Page 38
    .... We record refunds to subscribers as a reduction of revenues. We offer a variety of subscription plans, starting at $4.99 a month, that allow subscribers to keep either ... over a one-year period. We also revised our estimate of salvage values on direct purchase DVDs. For ...
  • NetFlix 2006 Annual Report - Page 39
    ... and modifying our Web site, our recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and other ... and capitalized software we use to run our Web site and store our data. Marketing. Marketing ...
  • NetFlix 2006 Annual Report - Page 40
    ...2006 (in thousands, except percentages and average monthly subscription revenue per paying subscriber) Revenues ...Percentage change over prior period ...Other data... 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
    ... cost subscription plans and the price parity of our subscription plans with those offered by competitors. • Service improvements. We continued to make improvements ... areas, including increasing the selection of titles as we expanded our DVD library and enhancing our Web site and ...
  • 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 ... in our customer service and shipping centers and an increase in facility-related costs ...
  • NetFlix 2006 Annual Report - Page 43
    ...2004 was favorably impacted by certain credits received from studios resulting from amendments to revenue sharing agreements. If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to ...
  • NetFlix 2006 Annual Report - Page 44
    ... spending offset in part by a decrease in cost of providing free trials associated with our lower priced plans coupled with a slight ... basis offset partially by a decrease in the cost of providing free trials associated with our new lower priced plans, and by a $2.1 million reduction in liability due...
  • NetFlix 2006 Annual Report - Page 45
    ... in 2007 in order to support our growing operations. Gain on Disposal of DVDs Year Ended December 31, 2004 2005 2006 (in thousands, ...as compared 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 thousands, ...
  • NetFlix 2006 Annual Report - Page 46
    ... to use the net proceeds from the sale of the common stock for general corporate purposes, including working ... service, the growth or reduction in our subscriber base, and our ability to develop new... efforts, business plans, operating performance and the condition of the capital markets at the time we...
  • NetFlix 2006 Annual Report - Page 47
    ... in deferred revenue due to a larger subscriber base and increase in gift subscriptions and ... under our employee stock plans. Contractual Obligations The following table summarizes our..., minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment...
  • NetFlix 2006 Annual Report - Page 48
    ... that fiscal year, including any financial statements for an interim period within that fiscal year. We do not expect the adoption of this ... No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do...
  • NetFlix 2006 Annual Report - Page 49
    ... Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, ...Executive Officer and Chief Financial Officer, does not expect that our disclosure controls ... report on Form 10-K for the year ended December 31, 2005, management identified a material ...
  • NetFlix 2006 Annual Report - Page 50
    ..., our management 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 financial reporting ... affect, our internal control over financial reporting. Item 9B. Other Information ...
  • 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
    ...notes thereto under "Item 8. Financial Statements and Supplementary Data." (3) Exhibits: Exhibit Number Incorporated by ... each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and ... and Netflix, Inc. dated June 26, 2006 Description of Director Equity Compensation Plan ...
  • 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 ......Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006 ...Notes to Consolidated Financial Statements ... F-2 F-4 ...
  • NetFlix 2006 Annual Report - Page 55
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc... position of Netflix, Inc. and subsidiary as of December 31, 2005 and 2006, and... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Netflix, Inc...
  • NetFlix 2006 Annual Report - Page 56
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc... (COSO). Netflix, Inc.'s management is responsible for maintaining effective internal control over financial ... Company Accounting Oversight Board (United States). Those standards require that we plan...
  • NetFlix 2006 Annual Report - Page 57
    ......Other current assets ...Total current assets ...DVD library, net ...Intangible assets, net ...... Stockholders' Equity Current liabilities: Accounts payable ...Accrued expenses ...Deferred revenue ...Total current ...40,589) 414,211 $608,779 See accompanying notes to consolidated financial statements....
  • 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...
  • 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, ... and equipment ...Amortization of DVD library ...Amortization of intangible assets ...Stock-based compensation ... and equipment ...Loss on disposal of short-term investments ...Gain on disposal of DVDs ...Non-...
  • NetFlix 2006 Annual Report - Page 61
    ...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 70,000 movie,...
  • NetFlix 2006 Annual Report - Page 62
    ... 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 withdrawal from the ...
  • NetFlix 2006 Annual Report - Page 63
    ... to 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 estimate for lost or damaged DVDs. See Note 2 for further discussion. Amortization of ...
  • NetFlix 2006 Annual Report - Page 64
    ... is generally one year. Revenue Recognition Subscription revenues are recognized ratably over each subscriber's monthly subscription period. ..., its recommendation service, developing solutions for the online delivery of content to subscribers, telecommunications systems and infrastructure and other ...
  • NetFlix 2006 Annual Report - Page 65
    ...enacted statutory tax rates applicable to future years to differences between the financial statement carrying ... pursuant to our employee stock purchase plan using the treasury stock method. The shares... outstanding-basic ...Effect of dilutive potential common shares: Warrants ...Employee stock options...
  • NetFlix 2006 Annual Report - Page 66
    ...price of excluded outstanding stock options was $30.71, $28.39 and $29.84 for the years ended December ..., 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 ...
  • NetFlix 2006 Annual Report - Page 67
    ... 3 years, respectively. In estimating the useful life of the DVD library, the Company takes into account library utilization as well as an estimate for lost or ... for the back-catalog DVD library from a "sum of the months" accelerated method using a one year life to the same ...
  • NetFlix 2006 Annual Report - Page 68
    ... been provided effective July 1, 2004. For those DVDs that the Company does not expect to sell, no salvage value is provided...the Company's Consolidated Statements of 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...
  • NetFlix 2006 Annual Report - Page 69
    ...years Other equipment ...3-5 years Computer software, including internal-use software ...1-3 years Furniture and fixtures ...3 years Leasehold improvements ...Over life of lease Capital work-in-progress ...Property and equipment, gross ...Less: ...
  • NetFlix 2006 Annual Report - Page 70
    ...rent escalation clauses during the lease terms or for rental payments commencing at a date other than ... minimum rental expenses on a straight-line basis over the terms of the leases in the Consolidated Statements... for the years ended December 31, 2004, 2005 and 2006, respectively. Litigation From time...
  • NetFlix 2006 Annual Report - Page 71
    ... the 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 upgrade in service level and Netflix subscribers who were enrolled in a paid membership before January 15...
  • NetFlix 2006 Annual Report - Page 72
    ...inflated subscription prices because potential competitors were allegedly deterred from entering the online DVD rental market by the Company's patents. The complaint purports to be on behalf of... adopted the 2002 Employee Stock Purchase Plan, which reserved a total of 1,166,666 shares of...
  • NetFlix 2006 Annual Report - Page 73
    ...available for future issuance under the 2002 Employee Stock Purchase Plan. Stock Option Plans In December 1997, the Company adopted the 1997 Stock Plan, which was amended...,333 to 500,000. Options granted under the 2002 Stock Plan generally expire in 10 years, however, they...
  • NetFlix 2006 Annual Report - Page 74
    ...'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 ... 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
    ... Stock Options 2005 2006 Employee Stock Purchase Plan 2004 2005 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% 4.76% 3.93 0% 77% 1.83% ...
  • NetFlix 2006 Annual Report - Page 76
    ... issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the ... following 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
    ... 35 percent to pretax income as a result of the following: Year Ended December 31, 2004 2005 2006 Expected tax expense at U.S. federal ... allowance 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 ...
  • NetFlix 2006 Annual Report - Page 78
    ... contributions totaled $379, $905 and $1,401, respectively. 11. Selected Quarterly Financial Data (Unaudited) March 31 (1) Quarter Ended June 30 (1) September 30 (1) December 31 (2) 2005 Total revenues ...Gross profit ...Net income (loss) ...Net income (loss) per share: ...
  • NetFlix 2006 Annual Report - Page 79
    ... February 28, 2007 Barry McCarthy Chief Financial Officer (principal financial and accounting officer) POWER OF ATTORNEY KNOWN ...Chief Executive Officer and Director (principal executive officer) Chief Financial Officer (principal financial and accounting officer) Director Director Director Director ...
  • NetFlix 2006 Annual Report - Page 80
    ... each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated... 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 ...
  • 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 Financial Officer Pursuant to ..., irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan ...
  • 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... comprehensive income, 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...
  • NetFlix 2006 Annual Report - Page 83
    ...assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls ...
  • NetFlix 2006 Annual Report - Page 84
    ...assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls ...
  • NetFlix 2006 Annual Report - Page 85
    ... Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) ...-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(a) ...
  • NetFlix 2006 Annual Report - Page 86
    ...ix headquarters 100 Winchester Circle Los Gatos, CA 95032 STOCK LISTING Netflix, Inc. common stock trades on the Nasdaq Stock Market under the symbol NFLX. Audit ... Winchester Circle Los Gatos, CA 95032 Phone: (408) 540-3639 SENIOR MANAGEMENT Reed Hastings Chief Executive Ofn..
  • NetFlix 2006 Annual Report - Page 87
    Netflix, Inc. • 100 Winchester Circle • Los Gatos, CA 95032 • www.netflix.com