NetFlix 2006 Annual Report Download - page 3

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DEAR FELLOW SHAREHOLDERS:
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
signifi cantly exceeded our goals for earnings. And for the second consecutive year
we were independently ranked number one in online retail customer satisfaction by
Foresee Results.
We also faced the challenges of a renewed offensive from a determined online
competitor as well as a rapidly changing array of alternatives for accessing video
content online.
We take these challenges very seriously. But we believe our achievements in 2006,
together with the outstanding growth potential of our market and the strength of
our business model, leave us well positioned to reach our long-term objective of
leading the online subscription movie rental business.
2006 RESULTS
In 2006, aggressive investment in growth enabled us to increase our subscriber
base 51 percent, from 4.2 million to 6.3 million subscribers. We achieved 15.7 percent
household penetration in the San Francisco Bay Area market, our fi rst overnight
market, and penetration in our newer markets continues to follow the Bay Area
growth curve. Churn, a measure of subscriber turnover, was lower in each quarter of
2006 than it had been in the comparable quarter in 2005 and declined to a record-
low 3.9 percent in the fourth quarter.
The scale effi ciencies made possible by our large subscriber base allowed us to invest
in growth and product enhancements at the same time that we exceeded our profi t
goals, with pretax profi ts up from $8.3 million in 2005 to $80.3 million in 2006 and
GAAP net income increasing to $49.1 million or $0.71 per diluted share.
NETFLIX 2006 ANNUAL REPORT
LETTER TO SHAREHOLDERS