NetFlix 2007 Annual Report Download - page 27

• competition, including the introduction of new competitors, their pricing strategies and services;
• market volatility in general;
• the level of demand for our stock, including the amount of short interest in our stock; and
• the operating results of our competitors.
As a result of these and other factors, investors in our common stock may not be able to resell their shares at
or above their original purchase price.
Following certain periods of volatility in the market price of our securities, we became the subject of
securities litigation. We may experience more such litigation following future periods of volatility. This type of
litigation may result in substantial costs and a diversion of management’s attention and resources.
We record substantial expenses related to our issuance of stock options that may have a material negative
impact on our operating results for the foreseeable future.
During the second quarter of 2003, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) for
stock-based employee compensation. In addition, during the third quarter of 2003, we began granting stock
options to our employees on a monthly basis. The vesting periods provide for options to vest immediately, in
comparison with the three to four-year vesting periods for stock options granted prior to the third quarter of 2003.
As a result of immediate vesting, stock-based compensation expenses determined under SFAS No. 123 are fully
recognized in the same periods as the monthly stock option grants. Our stock-based compensation expenses
totaled $12.0 million, $12.7 million and $14.3 million during 2007, 2006 and 2005, respectively. We expect our
stock-based compensation expenses will continue to be significant in future periods, which will have an adverse
impact on our operating results. The lattice-binomial model used by us requires the input of highly subjective
assumptions, including the option’s price volatility of the underlying stock. If facts and circumstances change
and we employ different assumptions for estimating stock-based compensation expense in future periods, or if
we decide to use a different valuation model, the future period expenses may differ significantly from what we
have recorded in the current period and could materially affect the fair value estimate of stock-based payments,
our operating income, net income and net income per share.
Financial forecasting by us and financial analysts who may publish estimates of our performance may
differ materially from actual results.
Given the dynamic nature of our business and the inherent limitations in predicting the future, forecasts of
our revenues, gross margin, operating expenses, number of paying subscribers, number of DVDs shipped per day
and other financial and operating data may differ materially from actual results. Such discrepancies could cause a
decline in the trading price of our common stock.
Item 1B. Unresolved Staff Comments
None.
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